Resiliency From Singapore; Recovery From Hong Kong
MPACT’s VivoCity benefits from the return of tourists to Sentosa Island and the expansion at RWS. Its four properties in the HarbourFront area benefits from the development of GSW, which is already underway. Recovery at Festival Walk in Hong Kong is supported by the return of Chinese tourists. MPACT has doubled in size and become more geographically diversified. It provides FY24 distribution yield of 5.6% and trades at P/NAV of 0.94x. Maintain BUY. Target price: S$1.90.
WHAT’S NEW
• Mapletree Pan Asia Commercial Trust (MPACT) benefits from resilient growth from VivoCity and Mapletree Business City (MBC) and recovery from Festival Walk.
• VivoCity: Tourists returning to Sentosa Island and VivoCity. MPACT has completed an 80,000sf reconfiguration to convert part of TANGS’ Level 1 space into a new retail zone with new Food & Beverage options and an enhanced beauty and fragrance cluster. The new retail zone has progressively reopened since May 23 and generated ROI of 20%. Resorts World Sentosa (RWS) has embarked on a S$4.5b expansion, including adding Minion Land to Universal Studios Singapore, expanding SEA Aquarium by three times, rebranding as Singapore Oceanarium and refurbishing three hotels. VivoCity benefits from the return of tourists as it serves as the gateway to RWS and Sentosa Island. 98% of all tourists visit Sentosa Island, including RWS.
• MBC: Steady and resilient contributor. MBC clocked positive rental reversion of 8.0% and retention rate was healthy at 62.9% in FY23. MPACT has renewed the majority of leases with Google Asia Pacific (largest tenant that contributed 5.9% of total gross rental income as of Mar 23) in FY22 and FY23. Occupancy at MBC was stable at 95.4% as of Mar 23. According to CBRE, average rents for City Fringe were flat qoq at S$6.10psf/month and vacancy rates remain low at 5.2% in 2Q23. There is no new supply of business park space at City Fringe in 2024 and 2025. MBC also benefits from the government’s efforts to promote
high-value manufacturing and knowledge industries.
• Festival Walk: Recovery from reopening of borders. Hong Kong has progressively eased COVID-19-related restrictions during 2HFY23 and quarantine-free cross-border travel between Hong Kong and Mainland China resumed in Jan 23. Visitor arrivals hit 2.8m in May 23, representing 48% of pre-pandemic levels. Tourists from Mainland China, which accounted for 30% of pre-pandemic retail sales, accounted for 79% of visitor arrivals in 5M23. Retailers also benefit from two instalments of consumption vouchers totalling HK$5,000 in April and July. Retail sales recovered 18.4% yoy in May 23, while restaurant receipts rebounded 81.8% yoy in 1Q23. Leasing demand is driven by tourist-oriented trades, such as F&B, pharmacies, cosmetics & beauty and watches & jewellery. CBRE expect retail rents to recover 5-10% in 2023.
• Japan portfolio: Weathering pressure from new supply. According to CBRE, vacancy rate at Central 5 Wards eased 0.1ppt qoq to 4.1% in 1Q23. There is a flight to quality with companies moving to higher grade and better located office buildings. Grade A rents eased slightly by 0.4% qoq to ¥22,550/tsubo in 1Q23. Several large-scale projects in Central 5 Wards will be completed in 2023. Landlords are expected to reduce rents to attract tenants. CBRE expects vacancy rate to increase and Grade A rents to drop 2.7% over the next 12 months.
• Coping with higher cost of debt. MPACT’s weighted average all-in cost of debt was 2.68% in FY23. Cost of debt is expected to increase as interest rates remain elevated and older fixed rate debt and interest rate swaps progressively mature. Currently, aggregate leverage is 40.9% and 75.5% of borrowings are fixed or hedged to fixed interest rates. We have factored in an increase in cost of debt to 3.2% in FY24.
STOCK IMPACT
• Expansion of scope. The merger with Mapletree North Asia Commercial Trust (MNACT) was completed on 21 Jul 22, which provided eight months of contributions in FY23. MPACT has doubled in size and become more geographically diversified. The acquisition provided a ready platform with scale for expansion in key Asian gateway cities. MPACT is no longer constrained to just the Singapore market.
• Prime beneficiary of GSW. The Greater Southern Waterfront (GSW) comprises 30km of coastline from Gardens by the Bay East to Pasir Panjang. Prime land within GSW will be freed up when container terminals at Tanjong Pagar, Keppel and Brani are moved to Tuas by 2027. GSW has 2,000ha of land, which is double the size of Punggol. MPACT has four properties, VivoCity, MBC, mTower and BOAHF, located in the HarbourFront area, which accounted for 49% of its portfolio valuation in aggregate.
• Development of GSW already underway. Keppel Club has moved to its new golf course at Lornie in 4Q22, which paves the way for the 48ha site to be redeveloped into 9,000 housing units (HDB flats: 6,000 units, private housing: 3,000 units). The first build-to-order project will be launched for sale within the next three years. Future residents will be served by the Labrador Park and Telok Blangah MRT stations. VivoCity will benefit from higher population within its catchment area. MBC’s tenants will also benefit from access to an enlarged talent pool within the GSW.
EARNINGS REVISION/RISK
• We trimmed FY24 DPU by 9% due to lower contribution from Japan (JPY depreciated 8.5% yoy against SGD) and China (CNY depreciated 10.1% yoy against SGD).
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$1.90 is based on DDM (cost of equity: 7.25%, terminal growth: 2.2%).
SHARE PRICE CATALYST
• Resilient growth from VivoCity and MBC in Singapore and recovery from Festival Walk in Hong Kong.
• MPACT has four properties located in the HarbourFront area, which accounted for 49% of its portfolio valuation. It will benefit from the development of GSW and rejuvenation of Sentosa Island and Pulau Brani.
