Preferential Offering A Mere Formality
The merger of MCT and MNACT to create MPACT will become effective on 21 Jul 22. It is accretive to pro forma 1HFY22 DPU by 8.9% based on the cash-only option. MPACT intends to expand its office and business park assets in South Korea and Mainland China. While Hong Kong’s international borders remain closed, Festival Walk will benefit from the easing of social distancing measures with the number of diners per table increased to eight since May. Maintain BUY. Target price: S$2.24.
• Final milestone before consummating the merger. Mapletree Commercial Trust (MCT) has embarked on a preferential offering on the basis of 306 preferential offering units for every 1,000 existing MCT units at an issue price of S$2.0039. Proceeds from the preferential offering will be utilised to finance the cash component of the purchase consideration of approximately S$2,454.5m payable to unitholders of Mapletree North Asia Trust (MNACT). The majority of MNACT unitholders have opted for the cash-only option whereby they receive cash of S$1.1949 per MNACT unit.
• Not worthwhile to subscribe to preferential offering. Most MCT unitholders will balk at the lofty issue price of S$2.0039, which is 12% higher than the current market price of S$1.79. Sponsor Mapletree Investments has demonstrated commitment and support for the merger by providing an undertaking to subscribe for the entire preferential offering. It has also agreed to a voluntary six-month lock-up of its unitholding.
• Sponsor sees merits and value in the merger. We estimate that sponsor Mapletree Investments’ stake in the merged entity, Mapletree Pan Asia Commercial Trust (MPACT), could potentially increase from 32.7% to a maximum of 55.7%, assuming none of the minority unitholders took up the preferential offering. Based on yesterday’s closing price of S$1.79, sponsor Mapletree Investments would have taken a paper loss of S$390m (consideration units: S$172m and preferential offering: S$218m).
• Growing through the 4R strategy. MPACT will drive future growth by adopting the 4R asset and capital management strategy: a) Recharge – maximise operational performance, b) Reconstitute – optimise portfolio through divestment, asset enhancement and redevelopment, c) Refocus – pursue accretive acquisitions and developments, and d) Resilience – capital management strategy to maintain a strong balance sheet, maximise liquidity and minimise risk.
• Scaling the league table. MPACT will become Asia’s seventh largest REIT with a market capitalisation of about US$5b. It will hold a diversified portfolio of 18 high quality commercial properties across Singapore, Hong Kong, Mainland China, Japan and South Korea. AUM will expand by 94% to a combined S$17.1b.
• Enlarged scale with greater financial flexibility. MPACT will have better financial flexibility and greater debt headroom to pursue larger acquisitions and development projects. Debt headroom for acquisitions will increase from S$2,911m to S$3,785m based on the maximum permitted aggregate leverage of 50%. The headroom for development projects increases from S$878m to S$1,710m.
• Sizeable increase to index weightage. Free float is expected to expand 1.5x to S$6.7b. MCT is a constituent of FTSE EPRA Nareit Developed Index, MSCI Singapore Index and the Straits Times Index. Management estimated that its index weight for MSCI Singapore Index would increase from 1.6% to 2.4% (up 0.8ppt), while its index weight for Straits Times Index would increase from 1.5% to 2.2% (up 0.7ppt).
• Merger provides geographical diversification. Management sees VivoCity, Mapletree Business City and Festival Walk as core assets. MPACT will focus on acquisitions of office and business park assets in key gateway cities in South Korea and Mainland China. It seeks to create value by recycling capital in Japan.
• Hong Kong has relaxed social distancing measures. Face-to-face classes at kindergartens, primary schools and international schools has resumed on 19 Apr 22. Gyms, beauty salons, religious places, libraries and sport venues have reopened with groups capped at four people starting 21 Apr 22. Operating hours for restaurants to offer dine-in service were extended from 6pm to 10pm. The onerous 14-day quarantine was lowered to seven days conditional on negative rapid test results on both the 6th and 7th days of hotel quarantine.
• Festival Walk benefits from easing of social distancing measures. The authorities have further eased social distancing rules by allowing residents to be mask-free when exercising outdoor and doubling the number of diners per table to eight since 3 May 22. The Special Administrative Region has avoided lockdown and mass testing, blunt instruments of China’s zero tolerance strategy. Festival Walk suffered two consecutive years of negative rental reversion (FY20: +8%, FY21: -21% and FY22: -27% (9MFY22: -32% and 4QFY22: -18%)) but outlook is gradually improving.
• Merger between MCT and MNACT is yield accretive. The merger is accretive to pro forma 1HFY22 DPU by 8.9% based on the cash-only option. It is also accretive to MCT’s NAV per unit by 6.5%.
• We raise our FY23 and FY24 DPU forecast by 3% and 9% respectively due to positive impact from the merger with MNACT. We have conservatively factored in negative rental reversion of 12% for Festival Walk in FY23 and gradual recovery thereafter.
• Maintain BUY. Our target price of S$2.24 is based on DDM (cost of equity: 7.0% (previous: 6.75%), terminal growth: 2.2% (previous: 2.6%)).
SHARE PRICE CATALYST
• DPU accretion from merger with MNACT.
• Growth from expansion in China and South Korea.
• GSW will increase the population of residents staying within VivoCity’s catchment area. Its office buildings, namely MBC I, MBC II, mTower and Merrill Lynch HarbourFront (MLHF), will benefit from an expanded pool of potential employees.
• Development of tourism attractions at Sentosa and Pulau Brani, which will improve shopper traffic and tenant sales at VivoCity.