Mapletree Pan Asia Commercial Trust (MPACT) - DBS Research 2022-09-14: Opportunity Not To Be Missed

• We believe this is an opportune time to ride on the potential upside of Mapletree Pan Asia Commercial Trust (MPACT, SGX:N2IU)’s portfolio optimization and recovery post the merger when valuation is still attractive.

Strong recovery post reopening in MPACT's key markets (Singapore, Hong Kong, China).

Singapore recovery has surpassed pre-COVID and expect more to come as tourism returns to normal.

• Since Singapore started to progressively reopen from the end of 2021 to fully reopening in Apr 22, we have seen VivoCity come back to life once again with the return of the hustle and bustle at the mall. Operations have progressively recovered with tenant sales improving from 91% of pre-COVID levels (FY2019) in 3QFY22 (quarter ending Dec 21) to 114% of pre-COVID levels in 1QFY23.
• According to our observations and on-the-ground research, we understand that most retailers believe the strong tenant sales that we have seen recently, could be sustainable. With the recovery of tenant sales, VivoCity’s NPI in 1Q23 has also surpassed that of pre-COVID levels at ~110%.
• Despite strong tenant sales recovery, footfall is still ~20%- 30% below that of pre-COVID levels. The shortfall could be led by tourist visits having yet to return to normal. As such, we believe that there is potential for growth, especially when countries such as China and Japan reopen travel borders.

Hong Kong recovery next in line.

• Given the strong recovery seen in Singapore with the reopening, we believe Hong Kong’s recovery could likely track that of Singapore when it fully reopens. Post the Omicron wave, easing measures have been implemented in late April and early May 22. Subsequently, Hong Kong has reduced hotel quarantine to three days from seven days in August 22. Market news seems to report that Hong Kong may fully lift travel measures in Nov 22 following a review.
• As at 1QFY23, Festival Walk’s tenant sales have recovered to close to 70% of pre-COVID levels, from the recent low of 38% in 3QFY22 during the Omicron wave in Hong Kong. Similarly, Festival Walk 1QFY23 NPI has recovered to 81% of the pre-COVID level. Despite tenant sales being impacted by the Omicron wave over two quarters (3QFY22 and 4QFY22), FY22 NPI recovered to 75% of pre-COVID levels. As such, there is at least a ~25% upside in Festival Walk’s contribution, should Hong Kong fully reopen and, hopefully, measures are eased in China.

Assuming full recovery of VivoCity and Festival Walk, MPACT could deliver ~7% 2-year DPU CAGR.

• Assuming a full recovery of VivoCity and Festival Walk, and that all other assets remain stable in FY24F, we estimate that Mapletree Pan Asia Commercial Trust’s FY24F DPU could reach close to 11 cents per share. This implies a FY24F dividend yield of 5.7%, with a 7% two-year DPU CAGR (two-year DPU CAGR would be 10% if excluding the retained distribution in FY21).

Portfolio optimisation to reposition and refocus on best-in-class assets in core market, Singapore.

• Post the merger with Mapletree North Asia Commercial Trust, Mapletree Pan Asia Commercial Trust has plans and the capacity to optimise the portfolio further, to reposition and refocus to retain good-quality assets in its core market, Singapore.
• Currently, Singapore assets contribute 54% of Mapletree Pan Asia Commercial Trust's FY22 NPI and 67% of 1QFY23 NPI. On AUM, Singapore assets comprise 52% of FY22 AUM.
• According to Mapletree Pan Asia Commercial Trust’s management, it may consider the divestment of non-core assets in non-core markets to streamline for operational efficiency.

Japan and China could be potential non-core markets

• Japan and China could be potential non-core markets, as they are two of the smaller markets that contribute 11% and 13% to FY22 NPI and 10% and 11% of FY22 AUM, respectively.
  • In Japan, we highlight some potential assets that could be considered for divestment. These include the Fujitsu Makuhari Building and SII Makuhari Building in Chiba, Japan that are currently master leased and may see some risk of non-renewal.
  • In China, Gateway Plaza in Beijing could be a potential divestment, given there could be the risk of non-renewal from its anchor tenant, BMW.

Singapore contribution could increase to ~70% if divestment is successful.

• If potential assets highlighted can be successfully divested, the contribution from Singapore assets may increase to close to 60% from the current 52% of AUM. By NPI, Singapore assets would contribute 62% and 74% of FY22 NPI and 1QFY23 NPI, respectively.
• In the longer term, should Mapletree Pan Asia Commercial Trust decide to fully divest Japan and China, the composition of the Singapore assets will increase to 65% of AUM. By NPI, the contribution of Singapore assets will increase to 70% and 80% of FY22 NPI and 1QFY23 NPI, respectively.
• However, we do note that divestments are highly dependent on market conditions and timing, which could be unpredictable.

Attractive valuation for the 3rd largest S-REIT

Currently trading at 5.3% and 5.4% yields, at above +2 standard deviation ofhistorical range and offering attractive yield spread of 2.3%-2.4%.

• As the third largest S-REIT by market cap post the merger with Mapletree North Asia Commercial Trust, Mapletree Pan Asia Commercial Trust is currently trading at 5.3% and 5.4% dividend yields for FY22F and FY23F, respectively, offering a very attractive valuation.
• Compared to the weighted average of the historical trading range of Mapletree Commercial Trust and Mapletree North Asia Commercial Trust, Mapletree Pan Asia Commercial Trust’s yield is trading at above +2 SD. We believe this offers an attractive yield spread of 2.3%-2.4% for a large-cap S-REIT.
• Moreover, there could be a potential upside to the yield should the recovery post further reopening be much stronger than expected. Based on our current DPU estimates, Mapletree Pan Asia Commercial Trust offers a ~4% two-year CAGR.

Trading below 1x P/NAV on pre-COVID valuations of assets.

• On a P/NAV basis, Mapletree Pan Asia Commercial Trust's share price is currently trading at 1.1x P/NAV, just a little above the mean of the weighted average of the historical trading range of Mapletree Commercial Trust and Mapletree North Asia Commercial Trust.
• While it may seem that Mapletree Pan Asia Commercial Trust is fairly valued, we note that its NAV has been devalued over the past few years during the pandemic. With the recovery in operations and assuming NAV could be revalued to pre-COVID levels, we estimate that P/NAV is at 0.97x, which is close to -1 standard deviation of its historical range and below its most comparable commercial S-REIT peer.

Re-instate coverage on Mapletree Pan Asia Commercial Trust with BUY rating and target price of S$2.30.

• We believe in the prospect of Mapletree Pan Asia Commercial Trust as the third largest S-REIT by market cap and second largest commercial S-REIT. We believe that Mapletree Pan Asia Commercial Trust’s retail assets will continue to ride on the border reopening and easing of COVID restrictions, especially in Hong Kong and China.
  • VivoCity recovery will continue with a pick-up in tourism, especially when China reopens its travel borders.
  • Similarly, Festival Walk will see stronger recovery when Hong Kong fully reopens and borders to China also reopen.
  • Its China office assets, albeit small, will likely have less rental rebates with the absence of lockdowns in Shanghai and Beijing.
• In addition, we believe Mapletree Pan Asia Commercial Trust now has the capacity to review and optimise its portfolio, given its larger size. With the successful potential divestment of non-core assets, likely in Japan and China, Mapletree Pan Asia Commercial Trust can once again reposition and refocus on its good-quality assets in its strong core market, Singapore. We believe investors will once again appreciate Mapletree Pan Asia Commercial Trust as a Singapore-centric commercial S-REIT.