MCT - VivoCity still the key driver of organic growth

MCT reported a good set of results; FY12/13 DPU came in 3% and 5% above HSBC and consensus estimates, respectively. MCT reported FY12/13 revenue of SGD219m and DPU of SGD0.065, beating HSBC estimates of SGD216m and SGD0.063 and consensus estimates of SGD210m and SGD0.062, respectively. The beat was driven by stronger-than-expected performance from VivoCity and PSA Building (PSAB), as well as better-than-expected NPI margins in 4Q. FY12/13 revenue and DPU were up 16% and 15% y-o-y, respectively.

VivoCity still the key driver of organic growth, but growth reaching a more mature stage. VivoCity continued to be the key source of strength for MCT’s portfolio, with occupancy close to 100% and average rental reversion of +33% in FY12/13. However, we note that VivoCity’s underlying mall performance is now reaching a more mature stage, with shopper traffic and tenant sales growth slowing to low-mid single digits (see page 3). PSAB also continued to be a positive surprise, with committed occupancy now at 100% and strong rental reversions of +44% on average for the year.

Management looking to make acquisitions; sees no need for large-scale asset enhancements in the near term. Management mentioned during the results briefing that they are looking to make more acquisitions in the near to medium term, given the right opportunities. MCT has said that Mapletree Business City (MBC) remains a likely acquisition from
its sponsor (with committed occupancy already over 90%) but this may take a while longer as details regarding the redevelopment of The Comtech need to be sorted out first at the sponsor level. With MCT’s portfolio assets now all relatively new or recently refurbished, management does not anticipate any large asset enhancements in the near term.

Maintain Neutral rating but raise our TP to SGD1.45 (from SGD1.25), as we increase our rental, occupancy and margin assumptions in line with what the company has achieved and what management is guiding. As a result, we have also increase our FY13/14-FY14/15 DPU estimates by 5%. While we like the solid organic growth generated by VivoCity, we are more cautious on the medium-term prospects for MCT’s office assets, given our negative outlook for the Singapore office sector. Our TP is based on the average of our DDM and NAV-based valuations, overlaid with our qualitative premium-discount framework. A positive catalyst for the stock could be the announcement of a value-accretive acquisition, and a negative catalyst for the stock could be MCT’s overpaying for an acquisition.