Continue to impress

MCT’s 4QFY3/14 revenue rose by 12.9% yoy and DPU rose by 12.4% yoy. FY14 DPU was slightly better than expected at 104% of our forecast due to strong rental reversion and the acquisition of Mapletree Anson. We raise FY15-16 DPU by 3-5% on the back of the strong results, coupled with the expectation of further room to grow through rental reversions and, in part, riding on the recovery trend in the office market. We maintain an Add rating on MCT with a slightly higher DDM-based (discount rate: 8.4%) target price of S$1.33.

Another stellar quarter

Mapletree Commercial Trust (MCT) reported 4QFY14 revenue of S$68.6m (+12.9% yoy) and DPU of 1.953 Scts (+12.4% yoy), mainly driven by the 37.6% rental uplift in leases both renewed and re-let at VivoCity. Meanwhile, the occupancy for the retail portfolio grew to 98.6% (from 97.5% in 4QFY13), mainly attributed to the higher occupancy at ARC. During the year, both shopper traffic and tenant sales grew by 1.4% and 5.6%, respectively. The occupancy cost at VivoCity remained largely unchanged at 17%. Similarly, the office portfolio also posted good rental reversion of 19%, with occupancy of the office remaining steady at 97.9%.

Well shielded from rising interest rates

Compared to a year ago, the leverage ratio dipped slightly to 38.7% (from 40.9%). Although this is higher than the industrial average of 31.8%, we seek comfort in MCT’s accessibility to loans and the fact that the next tranche of debt is only due to be refinanced in FY15/16. The all-in interest cost at the moment stands at 2.17% (2.18% in 3QFY14), with 64.3% of its total debt under a fixed rate. With these structures in place, we expect MCT to be well shielded from any hikes in interest rates.

We maintain an Add rating on a stable outlook

Looking ahead, with 16.3% of retail space and 7.5% of office space up for renewal in FY14/15, we are confident that the high portfolio occupancy of 98.2% will be maintained, particularly on the back of the strong positioning of VivoCity and a stronger office rental market outlook. We maintain our Add rating with a slightly higher target price of S$1.33.

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.

Waiting for the next big bang

• 4Q13 results slightly ahead of our expectations
  
• Organic growth outlook robust; further upside from acquisitions
  
• BUY, TP raised to S$1.53
  

Highlights

Strong end to FY13; slightly ahead of our expectations. Mapletree Commerical Trust’s (MCT) 4QFY13 revenue and net property income (NPI) rose by 22% and 23% y-o-y, to S$60.7m and S$44.2m respectively. Growth was largely driven by strong rental reversions at Vivo City and PSA Building, supported by improved occupancy levels of 97.7% (vs 94.6% a year ago). Meanwhile, the quarter also saw partial contribution from Mapletree Anson, which was acquired on 4 Feb 13. Distributable income came in at S$34.7m (+20% y-o-y), translating to a DPU of 1.737 Scts (+12% y-o-y).

Optimized balance sheet. With revaluation of close to S$196m made at the year end, MCT’s NAV increased by 11% to S$1.06. Gearing, as a result,fell slightly to 40.8%. Financial metrics remain healthy with an interest cover of 5.4x, c70% of interest costs is fixed, and weighted average lease expiry is 3.3 years.

Our View

Organic growth a main driver for FY14. MCT’s portfolio achieved a robust uplift in rental revenues for FY13 with strong retention rates of c83% (retail) and 65.2% (office). Notably, revenue from VivoCity increased by c6% y-o-y, supported by a 33% uplift in fixed rents while its office leases, namely PSA Building (PSAB) were signed at 44.3% higher rates. Looking ahead, the outlook remains robust coming from (i) the trust has 17.9% of its income up for renewal, of which a majority will be leases at VivoCity. The manager has plans to continue to remix the mall’s tenant base to maintain its appeal, and (ii) full year contribution from Mapletree Anson, which offers further upside when its leases are up for renewal in the coming year.

Recommendation

BUY, TP raised to S$1.53. While we believe that the current price fully reflects the positives of the current portfolio, we remain optimistic that given the significant pipeline from its sponsor, acquisitions will remain a key feature for MCT. A medium term target remains Maple Business City, which will provide a solid platform for MCT to grow to the next level. We have assumed S$1bn worth of acquisitions in FY15F (@ 5.25% yield, with an equity/debt funding ratio of 60%/40%, keeping gearing constant).

A difficult year to replicate

With strong rental reversions from VivoCity this year, we believe that MCT has set a high growth benchmark in FY13 that will be difficult to replicate in FY14. Trading at 1.4x P/BV and forward yields of 4.7%, further upside will need to come from major AEIs and acquisitions.

4QFY13/FY13 DPUs came in slightly above our and consensus expectations, forming 27/102% of our FY13 forecast. The variance is due to the earlier completion of its office acquisition. We tweak our DPUs and DDM target price (discount rate: 6.9%) higher for stronger VivoCity margins but maintain Neutral. Re-rating catalysts include accretive acquisitions.

A difficult year to replicate

We expect upside from rental reversions at VivoCity to peter out in FY14. MCT performed well in 4Q. 4Q DPU was up 12% yoy, thanks to positive rental reversions off a lumpy lease expiry profile and higher occupancy on existing assets. DPU was up 4% on a qoq basis.

VivoCity, a star performer, remains in the pink of health as it booked a 33% increase in fixed rents, while shopper traffic and tenant sales grew by 3.0% and 3.7% respectively. Coupled with healthy occupancy cost of ~16%, this should support positive rent reversions, though the increase should peter out with a more moderate 15% of retail leases expiring in FY14 vs. 33% in FY13.

Further leasing progress for other assets

Further leasing progress was made at PSAB Office and ARC, taking their committed occupancy to 100% and 81.9% respectively. The former benefitted from an expansion in demand from existing tenants, while ARC could see improvements as footfall and tenant sales pick up.

Maintain Neutral

With strong rental reversions and acquisition accretion, we believe that MCT has set a high growth benchmark in FY13 that will be difficult to replicate in FY14. Trading at 1.4x P/BV and forward yields of 4.7%, we think that positives are largely priced in and further upside will have to come from major AEIs and acquisitions.

• Mapletree Commercial Trust reported fiscal fourth quarter distribution per unit (DPU) of 1.737 cents (including the advance distribution of 0.603 cents already paid on 27 February 2013) which was ahead of market expectations.
  
• Solid growth in 4Q ’13 net property income (+23.4% y-o-y) came from strong portfolio occupancy at both its retail (97.5%) and office (97.9%) assets, and positive rent reversion.
  
• Nevertheless, its gearing ratio rose to 40.9%, up from 37.6% in the same period last year, as the property owner took up additional debt for its acquisition of Mapletree Anson ( where its purchase price of S$680 million is equivalent to approximately S$2,049 psf paid).
  
• Going forward, the uplift in gearing ratio would make it more difficult for the trust to acquire new assets via additional debt. The high occupancy rates at both its retail and office portfolios would also leave little room for earnings to surprise on the upside.