Frasers Centrepoint Trust - Stable DPU as Promised
- 1Q17 DPU was 2.89Scts, up by 0.6%, in line.
- Tweaks in management fees and savings from finance costs compensated for Northpoint’s AEI Causeway Point is steady, but weakening signs seen at smaller assets.
- Revised TP down by 3.9% to S$2.20 on slower retail growth forecast.
Ability to maintain stable DPUs.
- While many other S-REITs are expected to face declining DPUs over the next couple of years due to the slowing Singapore economy, Frasers Centrepoint Trust (FCT) offers investors a steady DPU profile. This is made possible by FCT’s conservative strategy of paying the majority of its management fees in cash, which enables FCT to increase payment of fees in units to sustain DPU.
Near-monopoly of shopping malls in the north.
- Northpoint and Causeway Point together contribute c.70% of FCT’s Net Property Income (NPI).
- While it is still several months away until Northpoint completes its asset enhancement initiative (AEI) in Sep 2017, we believe strong rental reversion at Causeway Point will support earnings and cushion any pressure from any decline in occupancy rates.
Significant reduction in cost of debt.
- The Manager had reduced the percentage of borrowings hedged into fixed rates from 74% to below 60%, in mid-2016 to benefit from their view that interest rates may stay low for an extended period. As such, we reduced our cost of debt assumptions to account for lower interest expenses in the near term.
- We lowered our DCF-based TP by 3.9% from S$2.29 to S$2.20 as we moderated rental growth due to a still weak retail environment.
- The stock offers a forward yield of around 6.0% and a total potential return of c.17.5%. Maintain BUY.
Key Risks to Our View
- Lease renewals in FY17. Reversion rate at Northpoint will test tenants’ confidence in the mall after AEI, whereas tactical lease management at Changi City Point and Bedok Point will help in the repositioning of the two malls.
- Interest rate risks. If expectations of rate hikes increase, the relatively high exposure to floating interest rates will increase the REIT’s cost of debt, thereby pressuring valuation.