Tuesday, April 28, 2020

Why I'm Not A Buyer of MNACT (SGX: RW0U) Yet

Mapletree North Asia Commercial Trust (MNACT) is scheduled to report their FY2019 results later today after the close of trading.

The Reits have been an investor's favourite for many years due to its staggering growth profile in the greater region of Beijing, Shanghai and Hongkong but with the tides turning, the question is if the market priced them in..

Here's why I don't think they are a compelling buy yet.



1.) Revenue and NPI to be severely impacted in Q4

If we take a look across the results for Q3 (1 Oct to 31 Dec 2019), GR dropped by 36.3% YoY to S$67.3m and NPI dropped by 40% to S$50.8m.

This is due to the closure of the Festive Walk mall since 13 November 2019 due to the HK riots and was only reopened on 15 January 2020. From a reporting point of view, that would mean a "lost" of 1.5 months of rental, even though they did receive the Distribution Top-Up due to the closure. Rental relief was also given to tenant because of the closure.

Barely after the mall was reopened on the 15 January 2020, it was impacted by the double whammy of Covid-19, hence the mall was once again had to be closed (limited opening) and rental relief once again be given to tenants.

The impact for Q4 looks to be greater than 1.5 months (Q3), if we take the impact to start from mid Feb onwards.

In other words, GR will look to drop much worse than the 36.3% YoY comparison reported in Q3, and NPI to drop by more than 40% YoY comparison reported in the same period.

2.) DPU Likely To Be Halved

DPU for Q3 dropped by 13.3% YoY due to the closure impact, even though this was partly helped by the distributional top up they get from their insurer.

Bare in mind this is 100% payout, and we might have a totally different story in Q4 when the manager might retain the majority of the distributional income after the temporary law is passed.

Using big brother MCT as an example, they have retained close to 60% of the distributional income in Q4 due to the potential impact of Covid-19 and we might see the same applied to MNACT.

Assuming a 40% payout, we are looking at 0.67 cents/share for Q4FY20, which is likely to be a 65% drop YoY to what was reported last year at 1.956 cents/share for Q4FY19.

3.) Revaluation Loss

This is probably going to be the most exciting part of the lot.

Full year results means there's going to be a revaluation exercise done on the investment properties.

Festive Walk, Gateway Plaza and Sandhill Plaza's valuation have been going up since the days they listed the Reit and this run looks to end this year.


I've tabulated across the last 3 years valuation for their properties and it looks like this.

For FY2019, I've worked backward by taking a haircut of 15% revaluation drop for Festive Walk, 5% for Gateway Plaza and 5% for Sandhill Plaza, using the average of the respective actual exchange rate.

If my above guestimate is true, the Reits are likely to book a total of S$733m revaluation loss on their investment properties (including translation loss/gain) which is likely to push their Q4 into negative loss position.

$733m downward revaluation will represent an NAV loss of about 22 cents/share. So we are likely to see NAV drop from $1.41 to $1.20 post revaluation.

4.) Gearing To Increase

MNACT has been able to navigate their gearing well due to their revaluation surpluses in recent year, but they are likely to deteriorate and struggle this year due to their revaluation losses.

Using the same above estimates, gearing is set to increase from the current gearing of 36.2% to above 40%. This will limit their ability to take on further loans either for working capital or acquisitions, and the likely scenario is a higher retained distributional income or placement/rights issue.

Conclusion

MNACT is not a bad investment because I think their properties and tenant quality are pretty solid over the long term but there are big overhang in the short to mid term.

If we use Wharf Reic and Hongkong Land as our closest benchmark, both companies have reported huge reversion and revaluation losses for their retail and commercial properties and we are likely to see the same fate for MNACT, which at the moment, I don't think the market has fully priced them in yet.




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8 comments:



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    ReplyDelete
  2. Hi, the result was out and was not too bad as you have described. Would you be buying in?

    ReplyDelete
    Replies
    1. Hi
      The results indeed came to me as a surprise because not only are the revaluation are the same in HKD (which I think has not considered the lower rental reversion in FY20 impact) but they also pay out 100% of the distributional income to their shareholders which I thought was not very prudent especially when their gearing has now reached closer to 40% and a revaluation minus will almost probably trigger a rights.

      So to your question I don't think I'd be putting my money in them yet because I think there are better Reits out there with a much greater risk reward than MNACT at the moment.

      Delete
  3. Hi bro,...

    Your article above was written on 28.4.2020, and you mentioned their dpu would most probably be 0.67c/share for 4QFY20. There was already an advanced dpu payout on 14.4.2020 amounting to 1.070c/share for the period 1.1.2020 till 27.2.2020.

    Looks like the two buildings in China did not drop in revaluation, though Festival Walk DROPPED, for obvious reasons. The new acquisitions of the two buildings in Japan helped to prop up the valuations too.

    CK

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  5. Hi Brian, thanks for the writeup on MNACT. I don't think it's v fair to compare Festival Walk with Wharf Reic though. You can consider using Sunlight Reit or Link Reit for a better comparison in my view.

    I have been to Harbour City and Times Square a few times, and they are very much dependant on tourist, especially Harbour City, where Chinese take a boat there to gamble, and the things sold there are generally branded stuff.

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