NORTHERN LIGHTS
- FCT is one of our top picks in the retail sector.
- We maintain our BUY recommendation, with TP of S$2.20.
- We believe that Causeway Point, which accounts for 46% of the Trust’s net profit income, will continue to surprise on the upside and support price performance.
Near-monopoly of shopping malls in the north.
- Northpoint and Causeway Point together contribute c.75% of FCT’s NPI. Both malls have performed well in recent years, delivering strong tenant sales growth and rental reversions after successful AEI works.
- With limited retail supply in the north of Singapore and an increasingly affluent population catchment, we believe that FCT will be a beneficiary of higher spending power and demand for shop space.
Upside to rental reversions given low occupancy cost.
- Despite slower reversions of 3.8% for 2QFY15, we are positive about underlying mall performance, and expect to see overall FY15 reversions of 6-7%.
- Occupancy costs dipped below 16% due to strong tenant sales growth at Causeway Point.
- On a portfolio basis, tenant sales rose 3.0% y-o-y while foot traffic recorded healthy 2.0% growth.
Valuation:
- We have a DCF-backed TP of S$2.20, based on a WACC of 6.5%, risk-free rate of 2.8% and terminal growth assumption of 1.5% p.a.
- Implied dividend yield of 5.25% for FY15 is in line with retail peers, and at a premium to mixed office/retail REITs.
- At its current price, FCT offers investors a dividend yield of 5.7% and 13% total return.
Key Risks to Our View:
- Stronger pick-up in tenant sales
- Our rental reversion assumptions are predicated on the generally weaker retail sales outlook in Singapore.
- We note that tenant sales for FCT’s portfolio have bucked the retail sales index (RSI) growth trend, and sustained outperformance could result in further positive re-rating of our DPU estimates.
(Rachael TAN; Derek TAN; Mervin SONG, CFA)
Source: http://www.dbsvickers.com/
