Growing pains alleviated
- Merger improves inorganic growth prospects through mandate expansion and enhanced financial flexibility from upsized S$3.5bn debt headroom.
- Timely diversification amid volatility. FY23F DPU raised 1.8% on merger accretion and revenue growth despite higher utility cost and interest rates.
- Undemanding valuations; 5.8% FY23F DPU yield attractive at +0.24 s.d. 10- year average and 0.9x P/NAV. Reiterate Add with DDM-based TP of S$2.11.
AUM doubled to S$16.7bn, growing pains alleviated
Post completion of the merger, MPACT’s enlarged portfolio of retail and office assets is valued at S$16.7bn (previously c.S$8.4bn) as at 1QFY23, making it the seventh-largest REIT in Asia by market capitalisation. Previous concerns over limited growth opportunities for Singapore-focused MCT have been allayed by the merger and expanded Pan-Asia mandate, with MPACT gaining assets in four new markets through the merger – Hong Kong (SAR), China, Japan and South Korea. This allows it to leverage ancillary local expertise to source for acquisitions. We estimate gearing will increase from 33.4% to 39.8% pre- and post-merger. Assuming gearing limit of 50%, debt headroom increases from S$2,976m to S$3,493m due to MPACT’s larger asset base, giving it greater financial flexibility when competing with other investors for assets.
Merger accretion/revenue growth triumph over near-term headwinds
Our post-merger FY23F/24F DPU of 9.98/10.09 Scts implies 1.8%/0.9% accretion to our pre-merger numbers, even after adjusting for higher electricity costs and interest rates. MPACT’s key assets include Festival Walk, VivoCity and Mapletree Business City (MBC) which account for 66% of combined AUM as at 1QFY23. VivoCity’s 1QFY23 tenant sales reached 119% of 1Q19 levels, driven by space optimisation and tenant mix rejuvenation initiatives. We project FY23F NPI to reach pre-COVID levels. Replication of this strategy at Festival Walk could result in higher revenue productivity, catalysing a recovery ahead of our current forecast of FY25F. FY23F/24F topline growth drivers include retail recovery, positive reversions at MPACT’s Singapore office/business parks and at Sandhill Plaza in Shanghai, and below-market lease expiries in its Japan portfolio.
Gaining Singapore-Asia exposure at enticing 5.8% yield, 0.9x P/NAV
We raise our FY23F-25F estimates to factor in contribution from Mapletree North Asia Commercial Trust and better performance of the portfolio, partially offset by higher utilities expense and interest expense. Our DDM-based TP (COE: 7.0%, LTG: 2.25%) implies 5.8% FY23F and FY24F DPU yield, on par with the 5.8% yield of its closest peer, CICT. Based on our estimated interest rate hedge of 79%, a 50bp increase in interest rates will reduce FY23F DPU by 1.6%. Downside risks include unfavourable exchange rates,