Analysts mixed on MPACT; CGS-CIMB upgrades to 'add' with lower TP; Maybank downgrades to 'hold' with lower TP

All analysts note that the REIT’s Singapore assets continue to outperform, but decline in DPU was due to higher costs and forex.

Analysts are mixed on Mapletree Pan Asia Commercial Trust N2iu (MPACT) following the REIT’s 1HFY2023/2024 ended Sept 30 results, which saw a 10.5% lower y-o-y distribution per unit (DPU) of 4.42 cents.

Maybank Securities’ Krishna Guha has downgraded his call to “hold”, with a lower target price by 26% to $1.25 from $1.70 previously. CGS-CIMB Research's Natalie Ong and Lock Mun Yee, on the other hand, have upgraded their call to “add” from “hold”, with a lower target price of $1.54 from $1.76 previously. DBS Group Research analysts Rachel Tan and Derek Tan have maintained their “buy” call with an unchanged target price of $2.

For Maybank’s Guha, MPACT reported 2QFY2024 DPU of 2.24 cents, an 2.8% increase q-o-q but 8.2% decline y-o-y. Its 1HFY2023/2024 DPU of 4.42 cents fell 10.2% y-o-y and was 47.5% his FY2024 estimates.

The analyst notes that while its Singapore assets continue to perform, the decline was due to higher funding cost, adverse foreign exchange (forex) movement and softness in overseas assets.

Contribution from China and Japan declined q-o-q and y-o-y due to negative reversions and adverse forex impact, says Guha. Meanwhile, Festival Walk revenue and net property income (NPI) for 2QFY2024 grew 3.4% and 2.1% respectively due to higher ancillary income.

However, Guha notes that higher borrowing costs through the year and increased number of units lowered the DPU for this quarter y-o-y.

The REIT’s debt cost rose to 3.34% from 3.17%, while its gearing stayed unchanged at 40.7%. Fixed rate hedge ratio increased from 74.2% to 79.9%.

Guha highlights that in the quarter, management swapped Hong Kong dollar loans to Chinese Renminbi to benefit from lower interest rates and align debt and asset mix.

Portfolio occupancy inched up to 96.3% from 95.7% led by gains in Singapore, Hong Kong and China assets, and year-to-date portfolio reversion of 3.2% accelerated from 2.4% in 1QFY2023/2024 led by VivoCity.

“Reversions remain negative for Hong Kong, China and Japan assets and outlook is unchanged. About 6% of gross revenue (as of March 2023) is exposed to assets in Japan, which may witness lower occupancy and valuation,” Guha notes.

The analyst says that he had underestimated the extent of borrowing cost increase in the previous upgrade note. While the stock yields 6.4% and trades at a 25% discount to book value, there are no catalysts amid downside risk to DPU and net asset value (NAV), he says.

“We factor in lower margins and higher borrowing cost to cut DPU by about 10%. Coupled with higher cost of equity, we lower our target price by 26% and downgrade to ‘hold’,” Guha says.

Meanwhile, CGS-CIMB’s Ong and Lock are more positive on MPACT’s outlook, as they see that the REIT is at an inflection point. In their report dated Oct 27, the analysts say they expect to see a resumption of positive DPU growth from FY2025 onwards largely driven by its Singapore portfolio.

They note that while devaluation, interest rate and forex risks remain, the stable Singapore portfolio which accounts for about 60% of NPI, will continue to provide growth as positive reversions on leases signed in FY2024 and higher gross turnover (GTO) rents from VivoCity all-time high tenant sales drive revenue growth.

“Due to the softer markets, negative reversions may continue in China and Japan. However, we are comforted by the high occupancy and five-to-seven-month runway to backfill known non-renewals,” the analysts say. “Meanwhile, we believe capital management efforts, such as the recent swapping of Hong Kong dollar (HKD) debt into Chinese renminbi (RMB), should deliver cost savings while MPACT awaits divestment opportunities to de-lever its portfolio.”

Despite their upgrade, the analysts have cut their DPU estimates for the FY2024-FY2026 by 0.4% - 4.7% as they factor in vacancy risk for the three properties in China. They have also raised their cost of debt assumption in their estimates. “Our dividend discount model-based target price dips mainly due to higher cost of equity assumptions,” they write.

Finally, the analysts from DBS are certain that MPACT is anchored by its strong presence and performance in Singapore.

“Operationally, Singapore assets delivered stronger growth (NPI +3.9% q-o-q) while overseas assets held steady (NPI flat q-o-q) despite weaker forex,” they write. “Portfolio occupancy inched up by 0.6 percentage points (ppts) to 96.3%. All assets saw better occupancy except Korea. Both VivoCity and Festival Walk saw almost 100% occupancy.”

They note that MPACT has backfilled about 35% to 40% of Unilever’s space and are in discussions with prospective tenants for another 45% to 50% of the space. In addition, Google has expressed that it will likely renew its lease expiring in May 2024, but will return two floors, while management expects reversions at Mapletree Business City (MBC) will remain flattish.

In their report dated Oct 27, the DBS analysts highlight that MPACT is embarking on a new asset enhancement initiative (AEI) at VivoCity to introduce more food & beverage offerings, and is expecting completion at the end of 2023.

“MPACT’s Singapore assets continue to outperform especially VivoCity which is charting new highs, offsetting some of the underperformance from its overseas portfolio, partially impacted by weaker forex,” they say.

While they note that there are some occupancy risks in the near-term and some macro risks, DBS analysts believe a strong performance of MPACT’s Singapore assets will support its portfolio while they await a stronger recovery from its overseas assets.

As such, they have maintained their “buy” call with a target price of $2, based on a risk-free rate of 3.5% and beta of 0.8. This implies 1x price to net asset value ratio (on NAV at pre-Covid-19 levels) and about 4.5% dividend yield.

As at 12.39 pm, units in MPACT are trading flat at $1.30.

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