Some improvement in outlook
? 3Q/9MFY3/22 gross revenue was slightly ahead of our estimates, at 28.2%/82.3% of our FY22F forecast.
? FW delivered a robust showing but the outlook for GW is likely to remain challenging.
? Reiterate Add rating with an unchanged TP of S$1.13.
3QFY3/22 business update highlights
In its 9MFY3/22 business update, MAGIC reported gross revenue/NPI of S$328m/S$247.4m (+12.8%/+14.9% yoy). 3Q gross revenue/NPI came in at S$112.6m/S$85.6m (+11.8%/13.1% yoy). 3Q/9M topline was slightly ahead of our estimates, at 28.2%/82.3% our FY22F forecasts. The improvement was due to lower rental relief as well as contribution from Hewlett-Packard Japan HQ, acquired in Jun 21, partly offset by lower rentals at Festival Walk (FW) and Gateway Plaza (GW). Portfolio occupancy ticked up slightly qoq to 97.5%. MAGIC’s leverage ratio stands at 42.1% at end-3Q. About 82% of its debt is on fixed rates.
Robust uptick in FW’s tenant sales and shopper traffic
9M gross revenue at FW grew 18.8% yoy to S$162.3m due to lower rent relief, partly offset by lower average rents. Retail sales/shopper traffic at FW rose 20.9%/27.7% yoy in 9M as consumption sentiment in HK SAR remained positive and also due to the government’s consumption voucher scheme to boost spending. Occupancy at FW stands at 100% at end-3Q. MAGIC reported a -32% rental reversion for 9M, though management guided the negative rental reversions appear to have bottomed out. MAGIC has a remaining 1.6% of portfolio gross rental income coming from FW’s lease expiries for the rest of FY3/22F.
MAGIC also plans to continue rejigging FW’s tenant mix to focus as a lifestyle hub. According to its announcement in Nov 21, MAGIC has entered into a settlement agreement with insurers on claims for property damage and revenue loss due to business interruption. The amount of S$3.5m, in excess of distribution top-ups paid in 3Q-4QFY20, will be distributed to unitholders as part of its semi-annual distribution for 2HFY3/22F.
Slower recovery expected in China office sector
Softer demand compounded by ample supply dragged on rental reversions at GW. MAGIC saw negative reversion of 25% with occupancy slipping qoq to 94.5%. Looking ahead, we anticipate the weak outlook to continue to drag on upcoming lease expiries with 0.2% and 5.1% of portfolio income to be renewed at GW in 4QFY3/22F and FY3/23F, respectively. Meanwhile, Sandhill Plaza (SP) saw lower occupancy of 98.6% although it experienced a +5% rental reversion. The Japan and Seoul office portfolio maintained a high occupancy of 97.8%/ and 97.7% and achieved rental reversions of +1% and +28%, respectively.
Reiterate Add rating
We leave our FY22-24F DPU estimates unchanged and maintain our DDM-based TP at S$1.13. With the ongoing proposed merger between MAGIC and MCT still underway, we believe the share price could remain range-bound in the near term. Nonetheless, at 6.3% FY22F dividend yield, MAGIC’s valuations look inexpensive. Potential re-rating catalyst: faster-than-expected recovery in Festival Walk (FW). Downside risks: slower-than expected recovery at FW and Gateway Plaza (GW).