Frasers Centrepoint Trust - DBS Research 2017-07-25: Leaping To The Finish Line

Frasers Centrepoint Trust - DBS Vickers 2017-07-25: Leaping To The Finish Line FRASERS CENTREPOINT TRUST J69U.SI

Frasers Centrepoint Trust - Leaping To The Finish Line

  • Only slight dip in 3Q17 DPU despite Northpoint’s AEI.
  • Results in line with positive rental reversion.
  • Northpoint’s AEI is on course for completion in September 2017 – only three more months to bear!.
  • TP raised to S$2.26 in view of lower risk overhang from Northpoint AEI, maintain BUY.



Northpoint AEI to elevate growth; BUY, TP S$2.26. 

  • All of FCT’s properties are suburban and necessity malls which generate a resilient income stream, and face much less threat from e-commerce or tourist spending. 
  • Its largest assets, Causeway Point and Northpoint, contribute c.70% of its Net Property Income (NPI) and are local monopolies as they currently do not have any comparable competitors in the north region of Singapore. 
  • In addition, the soon-to-be completed AEI at Northpoint in September 2017 will dissipate downside risk to earnings and elevate growth to overall distributions by more than 3% from pre-Northpoint AEI levels.


Where we differ: Higher DPU growth post-Northpoint’s AEI.

  • Our estimate of DPU growth from FY16 to FY18F of 3.4% is slightly higher than consensus estimate of 2.5%. We believe Northpoint can deliver above-consensus returns after the completion of its AEI and the integration with the new wing constructed by the Sponsor. 
  • Given the enlarged footprint and a lack of supply in the vicinity, FCT retains bargaining power for retailers who wants a presence in the northern region.


Potential Catalyst: Acquisition of Waterway Point. 

  • The much anticipated acquisition of a one-third stake in Waterway Point from the Sponsor, FCL will fuel further upside to earnings. 
  • FCT’s low gearing of c.30% avails the Trust with much needed financial muscle to fund the acquisition. We believe that FCT could potentially raise equity to part fund the acquisition, which in our view is still accretive assuming supportive share price.
  • Improved liquidity for the stock could also make FCT more attractive to larger fund managers.


Valuation

  • 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. The relatively high exposure to floating interest rates could increase the REIT’s finance cost, thereby pressuring DPU, should interest rates creep up unexpectedly.


Only a slight dip in 3Q17 DPU despite the worst quarter of Northpoint AEI 


Only slight dip in DPU y-o-y despite Northpoint AEI. 

  • 3Q17 DPU was 3.00 Scts, including S$1.4m or 0.15 Scts per unit retained from 1H17, down 1.4% y-o-y. 
  • 9M17 DPU represents 75.6% of our FY17 full-year forecast, in line with our expectations. 
  • Despite significant income loss incurred from Northpoint (NPI down 12.9% y-o-y) as the mall went through a quarter of the lowest occupancy during its AEI, the REIT was able to deliver flat DPU, thanks to 
    1. cash conserved for distribution as 70% of base management fees were payable in units versus 50% in 3Q16, in line with our estimates; 
    2. strong organic growth at Causeway Point, which currently contributes more than 50% of FCT’s NPI, whose quarter NPI was up by 5.0% or S$0.8m.

NPI (ex-Northpoint) up 6.5% y-o-y. 

  • 3Q17 gross revenue totalled S$43.6m, down 3.3% y-o-y. NPI was S$30.8m, down 1.3% y-o-y. 
  • As anticipated, the decline was primarily caused by the ongoing AEI at Northpoint. Excluding this, gross revenue for the rest of the portfolio would have gone up by 4.9% and NPI up by 6.5%, thanks to strong growth from Causeway Point.

Rental reversion of 0.4% or 5.4% excluding Bedok Point. 

  • A small proportion, around 5% of the portfolio NLA was renewed this quarter with an average reversion rate of 0.4%.
  • Causeway Point renewed 24 leases at an average of 5.8% (or c.1.8% annualised) higher rental. A few leases at Bedok Point were renewed at a whopping 30% lower rate. However, given Bedok Point’s contribution to the portfolio’s NPI is in the mid-3% currently and will further drop to low-2% after Northpoint resumes full operation, the impact is minimal to FCT’s NPI. Excluding Bedok Point, portfolio rental reversion would have been 5.4% (or c.1.7% annualised). 
  • Looking forward, minimal lease renewals are left for FY17, while the majority of leases due in FY18 come from Causeway Point, Yew Tee Point and Changi City Point, being 25%, 52% and 30% of the respective mall’s NLA. 
  • All assets registered high single-digit reversions in recent quarters, and we believe the trend will continue.

Portfolio occupancy remained stable and shopper traffic up.

  • Portfolio occupancy remained stable q-o-q at around 87%.
  • Excluding Northpoint, portfolio occupancy is 93.3%, compared to 94.0% last quarter. Shopper traffic is 3.7% higher y-o-y and 2.5% higher q-o-q excluding Northpoint.
  • Tenant sales is 3.3% lower y-o-y excluding Northpoint.

Northpoint AEI – only three more months to bear: 

  • The 18- month AEI, which commenced in March 2016, is on course for completion in September 2017. Pre-committed occupancy is expected to be north of 90% by December 2017 and the previously forecasted 9% uplift in rental compared to pre-AEI levels is on track.

Balance sheet remains strong. 

  • Gearing edged up slightly from 28.3% to 30% due to extra borrowings incurred for Northpoint AEI and the purchase of Yishun 10 podium in September 2016. Cost of debt remains at 2.2%, one of the lowest among S-REITs, due to its low interest hedging ratio.
  • NAV was trimmed marginally from S$1.93 to S$1.92 due to new units issued to pay management fees.


OUR VIEW 

  • With one more quarter to the highly anticipated completion of Northpoint AEI, we believe the worst is over and improvement in earnings and DPU will be evident in due course. 
  • Maintain BUY, Target Price raised from S$2.20 to S$2.26 after rolling earnings forward and moderating discount rate to account the lower risk overhang from the result of Northpoint AEI. 




Singapore Research DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-07-25
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.26 Up 2.200



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