UOB Kay Hian analyst Jonathan Koh has kept his “buy” call on Mapletree Commercial Trust (MCT) with a lower target price of $2.24 from $2.36 previously.
"The lower target price reflects the transition from a pure play for Singapore to a geographically diversified mix of real estate, comprising both developed and developing countries," says Koh.
The new target price represents REIT’s lowered terminal growth to 2.2% from 2.6%. Its cost of equity was raised to 7.0% from 6.75% previously.
In his report dated July 19, Koh notes that the REIT’s merger with Mapletree North Asia Trust (MNACT) will become effective on July 21.
Both MCT and MNACT will form Mapletree Pan Asia Commercial Trust (MPACT).
Further to his report, Koh has noted that both REITs are at the “final milestone before consummating the merger”.
MCT has embarked on a preferential offering, where it is offering 306 preferential offering units for every 1,000 existing MCT units at an issue price of $2.0039.
The proceeds of the offering will be used to finance the cash component of the purchase consideration.
However, the issue price represents a 12% premium to MCT’s unit price of $1.79 when it closed on July 18.
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“Sponsor Mapletree Investments has demonstrated commitment and support for the merger by providing an undertaking to subscribe for the entire preferential offering. It has also agreed to a voluntary six-month lock-up of its unitholding,” Koh writes, calling the preferential offering a “mere formality”.
“We estimate that sponsor Mapletree Investments’ stake in the merged entity, MPACT, could potentially increase from 32.7% to a maximum of 55.7%, assuming none of the minority unitholders took up the preferential offering,” he adds.
Based on MCT’s closing price of $1.79 on July 18, Mapletree Investments would have taken a paper loss of $390 million, Koh notes. The amount comprises the $172 million in consideration units and $218 million preferential offering.
Upon its formation, MPACT will become Asia’s seventh largest REIT with a market capitalisation of US$5 billion ($6.98 billion). Its portfolio will comprise 18 high quality commercial properties across Singapore, Hong Kong, Mainland China, Japan and South Korea. The merged REIT will have a combined asset under management (AUM) of $17.1 billion.
With better financial flexibility and greater debt headroom, Koh notes that the merged REIT will be able to pursue larger acquisitions and development projects.
“Debt headroom for acquisitions will increase from $2.91 billion to $3.79 billion based on the maximum permitted aggregate leverage of 50%. The headroom for development projects increases from $878 million to $1.71 billion,” he writes.
The merger between both REITs is accretive to pro forma 1HFY2022 distribution per unit (DPU) by 8.9% based on the cash-only option offered to MNACT’s unitholders. The merger is also accretive to MCT’s net asset value (NAV) per unit by 6.5%.
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As such, Koh has raised his DPU forecasts for the FY2023 and FY2024 by 3% and 9% respectively due to the positive impact from the merger with MNACT.
“We have conservatively factored in negative rental reversion of 12% for [MNACT’s] Festival Walk in FY2023 and gradual recovery thereafter,” he writes.
Festival Walk is likely to benefit from the easing social distancing rules in Hong Kong, says the analyst.
Units in MCT closed 1 cent higher or 0.56% up at $1.80 on July 19.
