Frasers Centrepoint Trust - DBS Research 2017-04-26: Charming Changi City

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FRASERS CENTREPOINT TRUST J69U.SI

Frasers Centrepoint Trust - Charming Changi City

• 2Q DPU was 3.04 Scts, flat y-o-y, in line.
• NPI (ex-Northpoint) up 2.8%, led by Causeway Point (CWP) and Changi City Point (CCP).
• CCP saw encouraging reversion and occupancy.
• Increased DPU forecast by 0.5%, TP unchanged.

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 September 2017, we believe strong rental reversion at Causeway Point will support earnings and cushion any pressure from any decline in occupancy rates.

One of the lowest finance costs among peers. 

• 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.
• The REIT’s average interest rate is c.2.2%, one of the lowest among S-REITs.

Valuation

• We maintain our DCF-based TP at S$2.20 and increased DPU for FY17F and FY18F by 0.5% and 0.7% respectively to reflect stronger-than-expected numbers mainly from CCP. 
• The stock offers a forward yield of 5.6% and a total potential return of 10.5%. 
• Maintain BUY.

Key Risks to Our View

• Lease renewals in FY17. Reversion rate at Northpoint will test tenants’ confidence in the mall after AEI.
• 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.

Singapore Research Team DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2017-04-26

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.200 Same 2.200