• • OCBC
  • Key Research Idea
•  
  • Mapletree Commercial Trust (MCT SP) - Strategic benefits from merger but moving to riskier markets
   
  • Notwithstanding macroeconomic and industry headwinds from the Covid-19 pandemic, we see signs of recovery and believe MCT&rsquo s strong parentage and healthy balance sheet will allow it to tide over near-term uncertainties, while its strong management team and portfolio are well positioned over the longer-term. Whilst Mapletree Commercial Trust (MCT) offers investors a unique exposure to the retail, office and business park sub-sectors in Singapore, given its portfolio of best-in-class assets such as VivoCity and Mapletree Business City, this could potentially change given the proposed joint merger with Mapletree North Asia Commercial Trust. If successful, the merged entity would become one of the largest REITs by market capitalisation listed in Asia, with a significantly larger scale and platform which is better positioned to unlock upside potential. That said, we believe MCT would gain new exposure to riskier markets and see dilution of its pure-play Singapore status.  BUY.  (Research Team)
   
  • Research Ideas
   
  • Mapletree North Asia Commercial Trust (MAGIC SP) - Proposed merger with MCT
   
  • Mapletree North Asia Commercial Trust&rsquo s (MNACT) portfolio comprises Festival Walk (FW) mall in Hong Kong, two properties in China (Beijing and Shanghai), eight commercial properties in Japan and one office property in Seoul, Korea. Headwinds from the pandemic and macroeconomic uncertainties adversely impacted MNACT&rsquo s performance in FY21, but we expect to see a recovery in FY22. Whilst MNACT had previously been positioned as a pure-play overseas commercial REIT, it announced on 31 Dec 2021 a proposed joint merger with Mapletree Commercial Trust. If successful, the merged entity would become one of the largest REITs by market capitalisation listed in Asia, and we believe this would help to reduce MNACT&rsquo s concentration risks in China and Hong Kong, and significantly bolster its scale and lower its cost of capital.       HOLD.  (Research Team)

Creating an iMPACT
M apletree is creating a larger REIT
■ MCT and MAGIC have proposed a merger. MAGIC unitholders to receive S$1.1949/unit consideration comprising MCT units or cash plus units.
■ With its larger debt headroom and asset under management (AUM), the merged entity could deliver accelerated growth and return in the longer run.
■ ReiterateHoldonMCTandAddonMAGIC.

MCT and MAGIC have proposed to merge via a trust scheme of arrangement, w ith MCT acquiring all MAGIC units in exchange for new MCT units or a combination of cash and MCT units. MAGIC unitholders w ill receive a scheme consideration of S$1.1949 for each MAGIC unit, to be satisfied by either (i) 0.5963 new MCT units at an issue price of S$2.0039 per MAGIC unit or (ii) a combination of 0.5009 consideration units and S$0.1912 in cash. This implies a gross exchange ratio of 0.5963x and values MAGIC at 1x P/NAV, 7.6% premium over its trading price as of 27 Dec 2021. MCT intends to fund the acquisition w ith debt, issuance of new units and perp depending on the option chosen by shareholders. The transaction is subject to approval and delisting of MAGIC is slated for mid-Jun 2022.

A larger and more diversified portfolio accelerates inorganic growth
Post the merger, the combined entity w ill be named Mapletree Pan Asia Commercial Trust (MPACT) and it w ill be Asia&rsquo s 7th largest REIT by market cap (from the current no.13 for MCT and no.29 for MAGIC), securing its position as a flagship commercial REIT in Asia w ith one of the broadest Asia mandates. The enlarged entity w ill be more diversified, w ith access to 18 commercial properties across five key gatew ay markets across Asia. With a larger AUM of S$17.1bn (SG 51%, HK 26%, China 11%, Japan 10%, Korea 2% retail 46%, office 34% and business parks 21%) and expertise in more markets, MPACT w ill be better positioned to explore grow th opportunities. The merged entity w ill adopt MAGIC&rsquo s fee structure (base fee: 10% of distributable income performance fee: 25% of yoy grow th in DPU), w hich is more aligned to shareholders&rsquo interests. Trading liquidity should also improve post the merger due to the higher free float and stronger index representation.

DPU accretive to MCT but dilutive to MAGIC
According to management&rsquo s pro forma estimates based on 1HFY22, the deal w ill be 7.5- 8.9% DPU accretive and 6.5-7.1% NAV accretive. For MAGIC, pro forma estimates based on 1HFY22 show ed the deal w as 17-18% DPU dilutive. Post-merger gearing w ill remain healthy at 39.2%, w ith higher debt headroom of S$3.785bn (based on 50% gearing limit).

Reiterate Hold on MCT and Add on MAGIC
We think the benefits of the merger could be felt in the longer run w hen the enlarged entity delivers accelerated grow th prospects. MCT&rsquo s shareholders w ill benefit from immediate DPU and NAV accretion. While the transaction is DPU dilutive for MAGIC, the deal provides shareholders a definite offer, a premium of 8.49 Scts vs. the trading price as of 27 Dec 2021, w hich is more than enough to offset the pro forma DPU dilution of 0.58 to 0.62 Scts (based on 1HFY22). We also see stronger returns in the future given the better and larger portfolio of the merged entity. Dow nside risks for both include accretive acquisitions upside risks include slow er recovery from the pandemic.