CGS International (CGSI) analysts Natalie Ong and Lock Mun Yee have maintained their “add” call on Mapletree Pan Asia Commercial Trust N2IU (MPACT) N2IU , while lowering their target price by one cent from $1.59 to $1.58 following a slower-than-expected recovery of Festival Walk mall in Hong Kong.
The analysts note that, according to Hong Kong’s Census and Statistics Department, Hong Kong sales value has dropped 6.1% y-o-y as at May 2024. This includes sectors such as food and beverage, supermarkets, clothes and footwear which are down by 5.0%, 1.5% and 9.2% respectively, over the same period.
Following this, CGSI’s Hong Kong analysts have revised their FY2024 Hong Kong retail growth forecast from a 3.0% y-o-y increase to a 6.0% y-o-y decrease.
In the Hong Kong analysts’ note on non-deal roadshows (NDR), they note that Link REIT’s management experienced a decline in retail sales from Hong Kong to Shenzhen after the reopening of its borders, due to Hong Kong residents crossing into Shenzhen on the weekends.
Additionally, Ong and Lock note that Link REIT’s management has also guided for flattish reversions for its Hong Kong retail portfolio in FY2025 ending March 31 following potential rent reductions and downsizing in certain trades, such as traditional Cantonese restaurants and supermarkets.
“Located in the affluent neighbourhood of Kowloon Tong, with tourists forming a lower proportion of footfall, we are cautious that Festival Walk may experience similar shifts in local consumer spending but with less upside from the recovery in tourist arrivals,” say the analysts.
This has subsequently led to weaker-than-forecast reversions in FY2024 ended March 31.
That said, 83 leases accounting for 31.7% of MPACT’s gross rental income (GRI) at Festival Walk are up for renewal in 1QFY2025, according to the REIT’s FY2023/FY2024 annual report.
Additionally, the analysts also estimate that MPACT’s supermarket tenant, TaSTe, whose lease expired in June, accounts for around 27% of FY2025 expiries ending March 31.
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“During MPACT’s 1QFY2024 analyst briefing, management said that it does not see the need to downsize the space occupied by the supermarket tenant,” add Ong and Lock.
With occupancy at Festival Walk remaining high at 99.7% as at end March 2024, the analysts view this positively in supporting MPACT’s renewal negotiations and rents.
Despite MPACT’s achievement of positive reversions on renewals on leases signed post-Covid in 2019, 6% to 8% of Festival Walk’s leases by GRI are still at higher, pre-Covid rent levels which could draw negative reversions on renewal in FY2025 ending March, they add.
As such, the analysts have lowered their target price to $1.58 as they decrease their FY2025 to FY2027 estimates by 0.4% to 0.8%, factoring in Festival Walk’s lower reversion rates and net property income (NPI).
“We believe that the slower-than-expected recovery of Festival Walk has been priced in; its share price has fallen 20% year-to-date (ytd),” say Ong and Lock.
They add that MPACT’s FY2024 distribution per unit (DPU) yield remains “attractive” at 7.1%, which is 2.1 above standard deviation from its historical yield.
Potential re-rating catalysts identified by the analysts include tenant remixing at Festival Walk, capital recycling and re-investments.
On the flip side, unfavourable forex movements eroding earnings growth, devaluation of overseas assets and longer-than-expected downtime from backfilling of vacancies are downside risks.
As at 12.43pm, shares in MPACT are trading at an unchanged $1.23.
