DBS Vickers 2015-08-11: Frasers Centrepoint Ltd - 3Q15 Results; Boosted by development completions. Maintain BUY.

FRASERS CENTREPOINT LIMITED TQ5.SI

Boosted by development completions 


 Strong set of 3Q15 results. 
 Clear income visibility through locked-in sales. 
 Time-tested strategy to recycle capital into REITs a key catalyst. 
BUY, TP S$2.36. 

Highlights 


Strong set of results in 3Q15 

  • Frasers Centrepoint Limited (FCL) reported a 43% rise in PATMI to S$181.5m ( or 98% rise after stripping off fair value gains in 3Q14). This was on the back of a 157% increase in revenues to S$1.01bn. 
  • The property development business segment was a major driver to topline, contributing c.64%, followed by Hospitality (12%), Australand (10%), investment properties (10%) and others (2%). 
  • The significant 375% rise in revenues for property development segment to S$651m was mainly due to recognition of Twin Waterfalls EC in Singapore which contributed S$572m as the project was completed in the quarter. This was also supported by ongoing sales at Suzhou Baitang in China as units in completed phases were delivered and Gemdale Megacity 2A started contributing. 
  • Hospitality segment revenues and PBIT grew by 136% and 55% to S$119m and S$30m respectively, largely due to the contribution from six hotels acquired by Frasers Hospitality Trust (FHT) post listing from TCC Group. 
  • In addition, an expanded portfolio – Sofitel Wenworth and Capri by Fraser, Changi City also contributed to the topline growth. 
  • Frasers Australand contributed positively to the group’s earnings. Average portfolio occupancy for the investment properties remains high at 96%. 

Strong balance sheet metrics 

  • Net debt-to-equity remains stable at 0.9x, within management's comfortable range. Both interest cover and percentage of fixed rate debt remain high at 8x and 63% respectively. 

Outlook 


Clear visibility of locked-in sales. 

  • FCL continues to offer strong earnings visibility through almost c.S$3.5bn in locked-in sales, which it is expected to recognise in the coming years. 
  • These are from its development projects in Singapore (S$1.3bn), China (S$0.6bn) and S$1.6bn from its residential development pipeline in Australia, underpinning strong income visibility in the medium term. 
  • While the group continues to draw down on past top-selling projects, this is replenished from the strong sales achieved at Northpark Residences in Singapore (570 units sold out of 700). 
  • The group’s landbanks for future sales are mainly coming from China and Australia which management is looking to launch opportunistically in the medium term. 

Targeting to derive 60% of its income base from recurring revenues 

  • 59% of FCL’s revenues are recurring, with a longer-term target of 60-70%. Looking ahead, we see growing income from the completions of Punggol Point (retail), Northpoint City (retail) and Frasers Towers (commercial), which will boost its earnings further while Centrepoint Mall is expected to undergo a S$50m makeover to boost traffic and revenues post completion in 2H16. 
  • Frasers Hospitality is also expected to see its footprint expand to 30,000 managed units by 2019. Existing capital recycling platforms 
  • FCL has existing capital recycling platforms in its listed REITs, Frasers Centrepoint Trust, Frasers Commercial Trust and Frasers Hospitality Trust, which can potentially acquire stabilised assets from FCL, freeing up capital to invest in other higher ROE development projects. 
  • The group has recently completed the sale of 357 Collins Street to Frasers Commercial Trust, a demonstration of its recycling capability.

Valuation: 


  • We recommend BUY on FCL, with a target price of S$2.36 based on a 30% discount to RNAV. 
  • We think that FCL is attractive at 0.7x P/Bk NAV and believe that the stock is trading at this level largely due to its tight liquidity constraints. 

Key Risks: 


Small free float. 

  • The stock has low free float with 87.9% of the company held by major shareholders TCC Group and Thai Beverage, thus leading to low liquidity. 

Currency risk. 

  • The group derives an estimated 30% of PBIT and 35% from Australia and could be impacted by the weakening AUD/SGD exchange rate.


Derek TAN | http://www.dbsvickers.com/ DBS Vickers 2015-08-11
BUY Maintain BUY 2.36 Same 2.36


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