Time to lock in profits
• 2HFY22 distribution per unit (DPU) rose 2.8% year-on-year (YoY) to 3.393 Singapore cents
• Recovery stifled by fifth Covid-19 wave in Hong Kong
• Additional rental reliefs given in 4QFY22, but relaxation of social distancing measures to help
2HFY22 results met our expectations – MNACT reported its 2HFY22 results which met our expectations. Gross revenue and net property income (NPI) rose 4.9% and 5.1% YoY to SGD211.2m and SGD160.1m, respectively, while DPU increased 2.8% YoY to 3.393 Singapore cents. This included a one-off distribution top-up of SGD3.5m from net insurance proceeds. Excluding this, we estimate that 2HFY22 DPU would instead have inched down 0.2% to 3.292 Singapore cents. For the full-year FY22, MNACT’s NPI jumped 10.2% to SGD321.9m. DPU grew 10.4% to 6.819 Singapore cents and this formed 101.6% of our forecast. The improvement in performance was driven largely by contribution from the acquisition of Hewlett-Packard Japan Headquarters Building and lower rental reliefs (FY22: SGD14.7m versus FY21: SGD49.8m). However, we note that the bulk of the rental assistance was given in 4QFY22 (~SGD10m) due to the fifth Covid19 wave in Hong Kong. Although the number of daily infection cases has declined significantly, we believe the situation remains fluid, and future rental reliefs are possible should the caseloads increase again.
Mixed operating metrics – The fifth wave in Hong Kong resulted in Festival Walk’s tenants’ sales declining by 27.5% YoY in 4QFY22, although overall tenants’ sales and shopper traffic were up by 8.7% and 11.5%, respectively, for the full-year FY22. There were also some encouraging signs for Festival Walk’s rental reversions, which came in at -27% for FY22, but narrowed to -18% for 4QFY22 versus -32% in 9MFY22. Management remains hopeful that rental reversions might bottom out ahead, given lower base effects and gradual loosening of social distancing measures in Hong Kong from 21 Apr 2022 (e.g. dine-in services extended from 6pm to 10pm; number of pax per table increased from two to four). Rental reversions came in at -24% for Gateway Plaza but were positive for its other assets: Sandhill Plaza +5%, Japan Properties +1% and The Pinnacle Gangnam (TPG) +44%. TPG saw an acceleration in rental uplifts as average rental reversion was only +28% for 9MFY22.
Time to lock in gains – In terms of financial position, MNACT’s aggregate leverage ratio improved from 42.1% (as at 30 Sep 2021) to 41.5%. We lower our fair value estimate slightly to SGD1.05 (previously SGD1.06) after increasing our risk-free rate assumption to 2.5%, although our FY23 DPU forecast is raised by 1.3%. Given that MNACT’s last closing price of SGD1.23 (as at 20 Apr 2022) is above the implied Trust Scheme offer price of SGD1.1949 and close to this offer price plus the declared 2HFY22 DPU of 3.393 Singapore cents, we believe unitholders can consider locking in profits. While we cannot rule out an improved offer from Mapletree Commercial Trust or a higher competing bid, we believe both scenarios are unlikely.
ESG Updates
MNACT has an ESG rating downgrade in Dec 2020. One of the key contributors to the downgrade was attributed to MNACT’s relatively weak business ethics policies and programmes, coupled with weak corporate governance practices compared to peers. Furthermore, the lack of a majority independent board, an independent chairman and a fully independent audit committee may hinder MNACT board’s oversight of management. On a positive note, MNACT has made good efforts to further increase the proportion of green-certified buildings in its portfolio relative to peers, and also has robust compensation practices relative to peers, including substantial non-pay benefits. On the financing front, MNACT secured two sustainability-linked loans in 2QFY22, which are tied to its energy and water intensity improvement targets. As a sign of good corporate governance and to align its interests with minority unitholders, management has waived its entitlement to any performance fee until such time that MNACT’s DPU exceeds the level in FY20 (7.124 Singapore cents), which was prior to the full year impact of the Covid-19 pandemic. SELL. (Research Team)