Frasers Centrepoint Trust - CIMB Research 2016-07-17: Volatility from Northpoint AEI

FRASERS CENTREPOINT TRUST J69U.SI

Frasers Centrepoint Trust - Volatility from Northpoint AEI

3QFY16 DPU was 26% of our FY16 forecast, boosted by the release of retained cashflow and more management fees in units; 9M16 DPU at 77% of our forecast.
Positive rental reversions offset by lower occupancy due to ongoing AEI works.
FY17-18 rental reversions to remain positive, more upside when NP AEI completes by end-FY17.
Healthy gearing of 28.5% with low refinancing.

As expected, FCT reported a 4.4% yoy drop in 3QFY16 revenue to S$45m while NPI fell 5.1% yoy to S$31.2m, impacted by the ongoing AEI works at Northpoint (NP), weaker performance at Changi City Point (CCP), as well as a slight expansion in cost ratio. However, distribution to unitholders and DPU was higher at S$27.9m and 3.04 Scts respectively, with the release of S$2.1m of cash retained from previous quarters and a higher proportion of management fees in units.

Although FCT experienced fairly flat shopper footfalls and a 1.8% dip in tenant sales during the quarter, rental reversions remained positive.
FCT renewed 4.6% of portfolio NLA with an average 8.3% uplift from previous levels, led by Causeway Point, NP and Yew Tee Point which saw 7-10% higher rents over preceeding rents. However, this improvement was insufficient to offset the drop in income from lower portfolio occupancy of 90.8% due to the asset enhancement works underway.

Rental uplifts should stay positive, moderated by lower portfolio occupancy as NP AEI picks up pace.
In the long run, we expect occupancy and rental upside from NP post AEI to boost bottomline as it is integrated with Northpoint City.
FCT has 38%/33% of rental income expiring in FY17/18. A sizeable proportion of this is in Causeway Point. Given its location and manageable occupancy cost, we expect positive rental renewals to occur. CCP’s occupancy should improve from 2QFY17 with a new anchor tenant.

Balance sheet is healthy, with gearing at 28.5%. FCT has recently refinanced its loans maturing in FY16 and achieved lower borrowing cost of 2.26%, with 78% of interest cost hedged. The trust has only a low 26%/8% of its loans due for refinancing in FY18/19. This puts it in a strong position to explore more inorganic growth drivers.

We tweak our FY16-18F DPU numbers by 1-5% to factor in a more moderated rental growth and occupancy outlook on the back of the NP AEI. However, our DDM-based price target is raised to S$2.25 as we lower our cost of equity assumption to 7.4% (vs 8.1% previously).
FCT is currently trading at 1.11x P/BV with a potential total return of 12%.
Maintain Add.
Risks to our rating are if there are delays to the AEI timeline or slower than expected leasing up rates.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-07-17

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 2.25 Up 2.10