Frasers Centrepoint Trust - Maybank Kim Eng 2015-10-26: Priced for Perfection

FRASERS CENTREPOINT TRUST J69U.SI

Frasers Centrepoint Trust - Priced for Perfection

4Q9/15 results met expectations. Near-term growth to flatten, barring acquisitions.
Rent reversions for FY9/16 could halve, as spot rents are declining. Though we increase DPU by 1.2-3% for better asset quality, our DPU is still flat to negative.
66% of debt due for refinancing in next two years cause for concern. Maintain SELL with higher SGD1.63 TP from SGD1.61, still based on 7% yield target.

Since acquiring Changi City Point (CCP) in 4Q9/14, FCT’s revenue and NPI have been growing by double digits. As YoY comparisons now fully feature CCP, 4Q9/15 revenue and NPI growth slowed to +1.7% YoY (+0.8 QoQ) and +1.2% YoY (-3.5% QoQ).
Growth from here could struggle to breach 2%, unless rent reversions improve from their current 6.3%. But we expect reversions to halve as spot rates are declining. OCR rents peaked in 4Q14 and have declined 2.5% YTD.
FCT’s tenant sales/sf have also tapered 4.8%/3%/2.2%/2.1% in the last four quarters. This makes 6+% reversions hard to fathom.
While FCT’s assets are solidly positioned, retail supply will be strong till 2018 (5.2m sf).
Labour restrictions could continue to keep operating costs high for retailers.

We find FCT priced for perfection, at 5.8% yield, it is trading at the extreme -1SD below cycle mean. There is room for disappointment as consensus DPU of 11.9cts for FY9/16 may be a tall order.
Risks include weaker-than-expected rent reversions and debt due for refinancing in FY9/16-17 (39% and 27%), amid higher interest rates.
Maintain SELL with TP up slightly to SGD1.63 from SGD1.61 after adjusting DPU. This remains based on a 7% yield target applied to FY9/17 DPU.

Joshua Tan Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-10-26

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.63 Up 1.61