Frasers Centrepoint Trust - Against All Odds
- Despite a challenging retail outlook for 2017, we believe Frasers Centrepoint Trust (FCT)’s suburban mall portfolio and proactive management would able to weather its challenges. Key catalysts ahead are:
- Growth from yield-accretive acquisitions;
- AEI works transforming Northpoint shopping centre;
- Occupancy rates improving for Changi City Point mall.
- BUY, with a DDM-derived SGD2.22 TP.
- FCT remains our preferred pick among retail REITs.
Expect more acquisitions in 2017.
- With its low gearing of 28.3% providing healthy headroom for debt (~SGD500m), management has been actively looking at acquisition opportunities, mainly in Singapore and in Australia.
- In Nov 2016, FCT acquired the retail podium of Yishun 10 Cinema Complex for SGD37.8m. We believe more acquisition opportunities lie ahead in 2017. Potential targets are Waterway Point (one-third stake owned by its sponsor Frasers Centrepoint Ltd) in the near term and Northpoint City in the medium term.
- We also see the possibility of opportunistic third-party acquisitions, as smaller players look to exit amid a tough retail climate.
Occupancy at Changi City Point to improve with new tenants moving in.
- New anchor tenants – supermarket giant NTUC FairPrice Finest and Japanese retailer Daiso – moved in recently, pushing its occupancy rate to slightly above 90% from 81%, and contributing positively to FY17 (Sep) numbers.
- With the expected opening of the downtown line MRT at its doorstep in early 2017, we expect increased footfall and higher tenant sales going forward, benefitting malls’ long term growth.
Northpoint AEI works are on schedule.
- The first phase of AEI works may be completed soon (Jan 2017), and entire AEI works are set be completed by Sep 2017. Post AEIs, Northpoint shopping centre would have better connectivity to the upcoming Northpoint City mall (its sponsor’s asset) along with reconfigured retail space, upgraded lifts, toilets, ceiling and floors at its common areas.
- Occupancy rates may still be impacted in the near term (anticipated to peak in 2QFY17) but management expects double-digit rental reversions once AEI works are fully done.
Expect mid single-digit rental reversions in FY17.
- We expect FCT’s resilient suburban malls to see mid single-digit rental reversions in FY17 despite a challenging retail environment. About 39.6% of its leases (as % of gross rental income) are expiring in the current financial year, with the bulk of it coming from key malls, ie Causeway Point and Northpoint, which face relatively less competition and have a huge catchment population.
- In 4QFY16 and FY16, FCT’s mall posted positive rental reversions of +4.6% and +9.9% YoY respectively.
Maintain BUY with a TP of SGD2.22.
- With a pro-active management team in place, we believe FCT’s suburban mall portfolio would be able to withstand challenges facing the retail industry. Its low gearing also provides headroom for opportunistic acquisitions-led growth in the near term.
- The stock offers FY17F- 18F yields of 6.1% and 6.5% respectively.