Mapletree Pan Asia Commercial Trust (SGX: N2IU) Valuation Report
Prepared by: Alex Lew
Date: 1st September 2024
Executive Summary
This report provides an updated look at Mapletree Pan Asia Commercial Trust (SGX: N2IU), factoring in the latest financial data from 2019 to 2023. Using the Discounted Cash Flow (DCF) method, I’ve estimated the intrinsic value of the trust to be SGD 6.45 per share. Since the current market price is SGD 6.8 per share, it appears the stock is marginally overvalued by about 5%. However, given the trust’s recent growth and increasing dividends, some investors might argue it’s fairly valued or even slightly undervalued.
1. Company Overview
Mapletree Pan Asia Commercial Trust (MPACT) is a significant player in the real estate investment trust (REIT) sector, with a strong focus on retail and office properties across Asia. In 2023, MPACT expanded significantly due to its merger with Mapletree North Asia Commercial Trust, leading to major jumps in revenue, net property income, and total assets.
2. Financial Performance (2019-2023)
Revenue:
- 2019: SGD 443.9 million
- 2020: SGD 482.8 million
- 2021: SGD 479.0 million
- 2022: SGD 499.5 million
- 2023: SGD 826.2 million (up 65.4% year-on-year due to the merger)
Net Property Income (NPI):
- 2019: SGD 347.6 million
- 2020: SGD 377.9 million
- 2021: SGD 377.0 million
- 2022: SGD 388.7 million
- 2023: SGD 631.9 million (up 62.6% year-on-year)
Amount Available for Distribution to Unitholders:
- 2019: SGD 264.0 million
- 2020: SGD 243.2 million
- 2021: SGD 314.7 million
- 2022: SGD 317.0 million
- 2023: SGD 445.6 million
Distribution per Unit (DPU):
- 2019: 9.14 Singapore cents
- 2020: 8.00 Singapore cents
- 2021: 9.49 Singapore cents
- 2022: 9.53 Singapore cents
- 2023: 9.61 Singapore cents
Key Financial Indicators:
- Total Assets: Grew from SGD 7.1 billion in 2019 to SGD 16.8 billion in 2023, primarily due to the merger.
- Total Gross Debt: Rose from SGD 2.35 billion in 2019 to SGD 6.94 billion in 2023.
- Net Asset Value (NAV) per Unit: Increased slightly from SGD 1.60 in 2019 to SGD 1.76 in 2023.
3. Method of Valuation
Discounted Cash Flow (DCF) Method:
To estimate the intrinsic value of MPACT, I used the Discounted Cash Flow (DCF) method. This method involves estimating the future free cash flows (FCFs) the trust is expected to generate, and then discounting these cash flows back to their present value using the Weighted Average Cost of Capital (WACC).
Here’s how I approached it:
Projecting Free Cash Flows (FCFs): I estimated the FCFs for 2024-2026 based on the trust’s operating income, adjusted for capital expenditures (CapEx) and working capital changes. Given the trust’s significant growth after the merger, I applied a 3% annual growth rate to reflect stabilization and operational efficiency.
Calculating the WACC: I used the Capital Asset Pricing Model (CAPM) to determine the cost of equity, factoring in the risk-free rate, market return, and the trust’s beta. The cost of debt was based on the interest rates of the trust’s outstanding debt. I settled on a WACC of 3.80% for the analysis.
Determining the Terminal Value: I calculated the terminal value, which represents the value of the trust’s cash flows beyond the forecast period, using a terminal growth rate of 2.0%. This reflects the long-term growth prospects of the REIT sector and the trust’s stable asset base.
Discounting Cash Flows and Terminal Value: I discounted the projected FCFs and terminal value back to their present value using the WACC. The sum of these discounted values gave me the enterprise value of the trust.
Deriving the Equity Value: By subtracting the trust’s net debt from the enterprise value, I derived the equity value. Dividing this by the number of shares outstanding gave me the intrinsic value per share.
4. Discounted Cash Flow (DCF) Analysis
Free Cash Flow (FCF) Estimation:
- 2023 FCF Estimate: Based on strong NPI growth and stable operating expenses, the estimated FCF after CapEx is around SGD 618 million.
- CapEx: Adjusted to SGD 1.5 million, given the expanded asset base post-merger.
Projected Free Cash Flows (2024-2026):
- 2024 FCF: SGD 637.2 million (3% growth reflecting post-merger stabilization)
- 2025 FCF: SGD 656.3 million
- 2026 FCF: SGD 675.9 million
Weighted Average Cost of Capital (WACC):
- Cost of Equity: 4.28%
- Cost of Debt: 3.5% (reflecting the increased debt load post-merger)
- WACC: 3.80%
Terminal Value Calculation:
- Terminal Growth Rate: 2.0%
- Terminal Value (2026): SGD 42,519 million
- Present Value of Terminal Value: SGD 37,115 million
Enterprise Value (EV) Calculation:
- Present Value of FCFs (2024-2026): SGD 1,909.4 million
- Present Value of Terminal Value: SGD 37,115 million
- Enterprise Value (EV): SGD 39,024.4 million
Equity Value Calculation:
- Net Debt (2023): SGD 6,940.8 million
- Equity Value: SGD 32,083.6 million
- Shares Outstanding: 5,260.9 million
- Intrinsic Value per Share: SGD 6.45
5. Interpretation and Market Perception
Why Some Investors Might See MPACT as Undervalued:
Strong Dividend Yield and DPU Growth:
- With a current yield of 6.84% and a consistent growth in DPU, income-focused investors might find MPACT attractive. They may argue that the current market price doesn’t fully capture the value of these reliable and increasing distributions.
Significant Growth from the Merger:
- The merger nearly doubled MPACT’s asset base and significantly boosted revenue and NPI. Some investors might believe that the market hasn’t fully priced in the long-term benefits and synergies from this merger.
Improved Financial Stability:
- The substantial increase in total assets and equity, along with effective debt management, could lead some investors to view MPACT as more stable and poised for future value appreciation.
Defensive Nature and Geographic Diversification:
- MPACT’s diversified portfolio across key Asian markets provides defensive characteristics that some investors may believe are undervalued by the current market price.
Why the DCF Analysis Suggests Slight Overvaluation:
Intrinsic Value vs. Market Price:
- The DCF analysis estimates the intrinsic value at SGD 6.45 per share, slightly lower than the current market price of SGD 6.8 per share. This suggests a marginal overvaluation of 5%.
Conservative Growth Assumptions:
- The growth rates used in this analysis are conservative, reflecting realistic expectations post-merger. If the market is pricing in more aggressive growth, the current price might be overly optimistic.
Higher Debt Levels:
- The significant increase in gross debt following the merger could pose risks that aren’t fully reflected in the current market price, justifying a more conservative valuation.
Modest Revenue and FCF Growth Post-Merger:
- While the merger has driven substantial revenue growth, the projected FCF growth remains modest, indicating the challenges of integrating and optimizing such a large portfolio.
6. Conclusion and Investment Recommendation
Intrinsic Value per Share: SGD 6.45
Current Market Price: SGD 6.8
Valuation vs. Market Price: The stock is currently marginally overvalued by approximately 5%.
While the DCF analysis suggests a slight overvaluation, the difference is small. Some investors might see the stock as fairly valued or even slightly undervalued, especially those focused on income and long-term growth prospects after the merger. Given the narrow margin of overvaluation and the potential for future growth, I recommend a HOLD position, with a close watch on post-merger performance and any further debt management strategies.