Phillip Securities Research 2015-07-24: Frasers Centrepoint Trust - A safe haven in tumultuous times. Maintain ACCUMULATE.

A safe haven in tumultuous times

  • Frasers Centrepoint Trust (FCT) reported 3Q15 results on Wednesday evening. Amidst the various headwinds retail S-REITs are facing, including lacklustre retail sales and impending rise in interest rates, we continue to favour FCT for its defensive portfolio of suburban malls. 
    • DPU of 3.036c for 3Q15, up 0.5% y-y 
    • Increase in gross revenue and DPU largely driven by full 9M contribution from Changi City Point (acquired on 16 June 2014) 
    • 9MFY2015 rental reversions at 6.2% y/y vs 6.5% in FY2014 
    • 9M15 distributable income and DPU at 72% of our FY15 estimates 

 Generally stable, with the key exception of Bedok Point – 

  • FCT portfolio occupancy remained relatively stable at 96.5% (down slightly from 97.1% in 31 March 2015). 
  • Across the board, occupancy remained stable with no notable disruptions, with the exception of Bedok Point, where occupancy fell to 84.9% from 94.2% in 31 March 2015, 

 Bedok Point – Lacklustre for now, but not impactful in the grand scheme of things 

  • Though Bedok Point is a convenient 5-10 minute walk away from Bedok MRT, we note that occupancy started to suffer after Bedok Mall, recently acquired by CapitaLand Mall Trust (CMT), opened in December 2013. 
  • Being much smaller in size (NLA about one- third of Bedok Mall’s), Bedok Point has disadvantages in terms of variety of offerings. 
  • Bedok Point also has a substantial portion of NLA (~52%) made up of F&B and services/education tenants such as foot reflexology and tuition centres. This makes for purpose-specific shopping and would appeal less to leisure window-shoppers to boost human footfall. 
  • Harvey Norman and Challenger, which occupy a substantial area in the basement, could also have their work cut out trying to attract shoppers over (Bedok Mall has Best Denki which has similar offerings). 
  • Nonetheless, investors having concerns over Bedok Point should note that it constitutes a mere ~5% of FCT’s portfolio (by valuation). 
  • Based on our rough estimates, Bedok Point’s passing rents are almost half of that in Bedok Mall, or even lesser. This is despite both malls being just ~500m apart on the map. 
  • With Bedok Mall running at close to full occupancy and no other competing malls around, Bedok Point would represent the next viable option for retailers wishing to target one of the largest residential estates in Singapore. 
  • A successful repositioning of the mall could see occupancy rates going up again and the differential in rental price narrowing. 

 F&B outlets performing better in current retail climate. 

  • Management guided that F&B outlets are generally faring better in this current retail environment. We note that FCT has ~34% of gross rental income coming from F&B outlets vs ~27% for closet peer CMT as of last financial year end. 
  • The higher level of exposure to necessity spending vs discretionary spending (by gross revenue) in FCT’s portfolio should also help it hold out better in terms of tenant sales stability. 
  • Rental reversion as at 9M15 stands at 6.2%, slightly lower than the range of 6.5%-12.1% from 2010 to 2014. 
  • Management is optimistic about holding reversion rate at around this current level for full FY15. 

Investment Action 

  • We maintain our “ACCUMULATE” call on FCT and DDM-derived target price of S$2.14

(Dehong Tan)

Source: http://www.poems.com.sg/