Frasers Centrepoint Trust - CIMB Research 2016-12-05: Growing to new heights

FRASERS CENTREPOINT TRUST J69U.SI

Frasers Centrepoint Trust - Growing to new heights

FCT is one of our top picks. We like its sub-urban resilience and acquisition upside.
Expect deceleration in earnings momentum to trough in FY17 as Northpoint’s AEI is scheduled to be completed in Sep 17.
Low gearing provides deep capacity to explore inorganic growth prospects.

FCT has de-rated from a high of 1.14x P/BV in Sep to the current 1x P/BV, 1 s.d. below historical mean.
On the back of the recent acquisition of the retail podium of Yishun 10 Cinema Complex for S$37.8m, we trim our FY17-19F DPU by 1%.
Due to across-the-board hike in Singapore Rf from 2.2% to 2.8%, we lower our DDM-target price (S$2.01) and maintain Add on the stock. FCT is one of our top picks within the sector. Its sub-urban resilience offers investors a 6% FY17 dividend yield, in line with historical mean. We think the stock could re-rate when the peak of Northpoint’s AEI passes through in 2HFY17, and occupancies and earnings recover.
Further catalysts could also come from acquisitions. Downside risk could come from a delay in the completion of the Northpoint AEI.

Although FCT experienced positive rental reversion of 4.6% in 4QFY16 and 9.9% in FY16, lower occupancy of 89.4% affected performance.
Northpoint is currently undergoing AEI and saw take-up sliding to 70.9%.
Meanwhile, Changi City Point’s occupancy fell to 81.1% due to transitional vacancy from the changeover of an anchor tenant as well as tenant remixing.
This was partially offset by better performance at Causeway Point and other malls.
Bedok Point continues to see lower yoy performance.

We anticipate rental reversions to stay positive, although at a more moderated pace of 0-3% as slowing retail sales would cap landlords’ ability to raise rents.
FCT has 39.2%/30.9%/23.8% to be renewed in FY17-19F. A sizeable portion of FY17F expiries are in Causeway Point. Given its niche location, we think the mall would be able to increase its rents.
Also, we think the vacancies at Northpoint are expected to peak in 2HFY17.
Northpoint’s AEI is scheduled to end in Sep 17 and we understand there is good leasing interest post-AEI.

The balance sheet is healthy with gearing at 28.3%. This puts the trust in a strong position to explore inorganic growth, both overseas and locally. Its sponsor has two assets that could be injected when stabilised.
FCT’s borrowing cost remains low at 2.1% with 59% of interest cost hedged. The trust has S$218m or 30% of its loans due to be refinanced in FY17.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2016-12-05

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.01 Down 2.280