MCT – CIMB

Growth expected to slow

Although the results are slightly better than expected, in view of 1) a lack of meaningful catalysts; 2) only 16% of retail leases up for renewal in FY15and 3) relatively high valuations, we believe that the high valuations are not justified in this environment.

2QFY3/14 results were slightly above with 2Q DPU at 28% and 1HFY14 DPU at 54% of our full-year forecast. As a result, we raise FY14-16 DPUs by an average of 5.5%. However, with a lack of meaningful growth catalysts coupled with its high valuation in a rising interest rate environment, we downgrade to an Underperform from Neutral with a slightly higher DDM-based target price (discount rate: 7.9%) of S$1.28.

Good growth in 1HFY14

2QFY14 gross revenue was 27.1% higher than a year ago. This was mainly attributed to positive contributions from VivoCity, PSAB and additional revenue from Mapletree Anson (accounts for c.57% of total growth). As a result, the income available for distribution grew by 29.1% yoy. During the quarter, MCT renewed/re-let 87% of the leases expiring in FY14, with a positive rental reversion of 37.1% and 23.4% for retail and office space, respectively.

Limited room to grow

Although rental reversions have played an important role in MCT’s stellar performance, we expect growth within the REIT to taper off considering only 1.6% of retail leases will be renewed in FY14 and 16% in FY15, while the portfolio occupancy rate stood at 98.9%. Furthermore, with a gearing of 40.8% coupled with compressed cap rates within the commercial property space, we believe that it will be challenging to find yield-accretive acquisitions in the near term.

Downgrade to an Underperform

On the back of limited room to grow through rental reversions, a tight M&A market coupled with a P/BV of 1.2x and compressed FY14 and FY15 yields of 5.5% and 5.6%, respectively (against a rising interest rate environment), we believe that major AEIs and acquisitions are required to re-rate the stock.