Frasers Centrepoint Trust - Phillip Securities 2015-10-23: Expected to ride out uncertainties next year

Frasers Centrepoint Trust - Phillip Securities 2015-10-23: Expected to ride out uncertainties next year FRASERS CENTREPOINT TRUST J69U.SI 

Frasers Centrepoint Trust - Expected to ride out uncertainties next year 

  • Frasers Centrepoint Trust (FCT) announced their FY15 results yesterday morning. DPU for FY15 grew to a new high of 11.6 cents, the ninth consecutive year of DPU growth since FCT listed. 
  • However, this comes slightly below our expectation due to Changi City Point and Bedok Point’s weaker performance against our forecasts. FCT’s two main malls Causeway Point and Northpoint continue to drive group performance. 

Key takeaways from analyst briefing: 

 FY15 Overall Portfolio occupancy dropped almost 3% yoy to 96% from 98.9% in FY14. 

  • Causeway Point and Northpoint continue to drive earnings, with c.66% of total NLA renewed in FY15 coming from these two malls. Changi City Point suffered a dip in occupancy in FY15 despite the opening of the new Singapore University of Technology and Design in the vicinity this year, which was expected to drive footfall, and thereby tenant sales. 
  • Management guided that occupancies at these two malls are likely to remain around current levels in the near term while tenant re-adjusting takes place. 
  • We think Changi City Point should start to improve towards end of next year once construction work on the Downtown Line MRT 3 completes in early 2017. This could be a booster to earnings in FY17. 

 Overall Portfolio Rental Reversions similar to FY14. 

  • Overall portfolio rental reversion came in at 6.3%, lower than the 6.5% in FY14 by a whisker. This is the lowest level of rental reversion FCT has seen since IPO in 2006. Outperforming trade sectors remain the same. Management guided that F&B outlets, supermarkets and sports outlets are the outperforming sectors. Fashion shops, especially the smaller ones have struggled. We think malls are getting increasingly service-oriented and it is hardly surprising small fashion shops and CD/book shops would bear the brunt of the onslaught of e-commerce and the proliferation of websites and services like Taobao, Qoo10, and iTunes. 

 Upcoming AEI for Northpoint to commence March 2016. 

  • The upcoming AEI will focus on enhancing shopper experience and facilitating the integration of Northpoint with the upcoming retail component of Northpoint City by Frasers Centrepoint Limited. Northpoint will remain open for business throughout the course of the AEI. Management expects human traffic in the mall to remain strong even during the AEI period. Updates on the AEI would be provided in due course. 

 Update on potential acquisition of Waterway Point. 

  • Management remains non- committal on any possible time frame for the acquisition, but noted that with just a few months to opening of the mall, pre-committed occupancy has hit about 90%. 

What do we think? 

 Uncertainties in FY16. 

  • Apart from the yet-to-be-known scale and disruption of the AEI on Northpoint commencing in March 2016, and its impact on earnings, Changi City Point and Bedok Point are expected to remain sluggish due to i) continuing MRT works (only expected to end early 2017) and ii) seemingly unloved Bedok Point’s continued struggle to attract tenants despite approximate passing rents going at less than half that of Bedok Mall, just a 5minute walk away. 

 Potentially higher funding costs over the next 2 years a second headwind. 

  • In addition to the uncertain leasing outcomes surrounding Changi City Point and Bedok Point, FCT faces potentially higher finance costs with 65.2% of total debt due for re-financing over the 2 years. 

 Optimistic over long term prospects with hugely exciting properties in the pipeline. 

  • Investors willing to look past the near term uncertainties should see themselves duly rewarded in the long term with 2 hugely exciting properties in the sponsor’s pipeline, Waterway Point and Northpoint City. 

Investment Actions 

  • We maintain our ACCUMULATE call with a reduced DDM-derived target price of S$2.07 from $2.14. 
  • We cut some of our growth assumptions on the back of continued weakness from Bedok Point and the weaker than anticipated performance from Changi City Point.

Tan Dehong Phillip Securities | http://www.poems.com.sg/ 2015-10-23
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 2.07 Down 2.14