Frasers Centrepoint Trust - RHB Invest 2017-10-26: Now NEUTRAL As Positives Are Priced In

FRASERS CENTREPOINT TRUST J69U.SI

Frasers Centrepoint Trust - Now NEUTRAL As Positives Are Priced In

Frasers Centrepoint Trust’s (FCT)’s suburban malls continued to register healthy positive rental reversions (FY17: +5.1%) despite a challenging retail climate. However, the rental growth did not come with higher shopper traffic and tenant sales, which continued to decline.
Northpoint City North Wing (NCNW)’s occupancy rate is set to improve sharply in the coming quarter, as its AEI is almost completed. The opening of DTL-3 should also benefit Changi City Point (CCP).

While FCT has many potential near-term catalysts, we believe the strong +16% YTD rally in its share price indicates that most of the upside is already priced in.
Downgrade to NEUTRAL, with a SGD2.24 TP (from SGD2.22, 2% upside).

Despite the soft retail environment, Frasers Centrepoint Trust’s (FCT) malls registered a positive rental reversion of +8.3% in 4QFY17 (Sep), reflecting the underlying strength of its well-located suburban malls. Causeway Point, which accounted for 51% of FY17 NPI, continues to be the key driver (rental reversion: 7.6%).
For FY18, about 29.2% of leases (as a percentage of income) are due for renewal, for which we expect positive rental reversions of low- to mid-single digits.

The AEI at Northpoint City North Wing (NCNW) is almost complete, and the final expenditure is likely to be below its budget of SGD60m. Post-AEI, management noted that average rental is likely to be better than the estimated 9%. However, the reconfigured mall’s NLA is likely to drop by a higher 7.5% (original projection: 4%), offsetting some of the rental increase.
With tenants progressively moving in, its occupancy rate has risen sharply to 81.6% as at end-4QFY17 (3QFY17: 65.9%). It is expected to cross 95% by end-2017.

Shopper traffic at Changi City Point (CCP) is set to improve with the recent opening of Downtown Line 3(DTL-3).
We also expect CCP’s occupancy to improve (now at 88.5%) and see good positive rental growth from the better transport connectivity. About 36% of its leases (as percentage of total rent) are due for renewal in FY18, for which we expect mid-to-high single-digit positive rent reversions.

FCT’s gearing remains relatively low, at 29%, providing ~SGD500m in debt headroom (assuming a comfortable level of 40%). We believe Waterway Point (one-third owned by sponsor Frasers Centrepoint Ltd) is a good fit to its portfolio in the near term and Northpoint City South Wing over the medium term.
FCT is also looking at third-party assets in Singapore and could potentially expand to Australia at an opportune time.

Downgrade to NEUTRAL, with a DDM-based SGD2.24 TP (COE: 7.4%, TG: 1.75%) as we roll forward our DPU forecasts.
While we see near-term catalysts, Frasers Centrepoint Trust's recent share price rally has factored in the upside. The weak retail demand, higher incoming retail supply and rising e-commerce also remain as threats.
We maintain our earnings estimates.
Key re-rating catalysts would be yield- accretive acquisitions and a continued positive momentum in retail sales.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-10-26

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