Frasers Centrepoint Trust - Phillip Securities 2016-01-22: Short-term pain, Long-term gain

Frasers Centrepoint Trust - Phillip Securities 2016-01-22: Short-term pain, Long-term gain FRASERS CENTREPOINT TRUST J69U.SI 

Frasers Centrepoint Trust - Short-term pain, Long-term gain 

  • Frasers Centrepoint Trust announced their 1Q16 results with revenue coming in flat y/y, and 1Q16 DPU rising 4.4% y/y due to lower property expenses. 
  • 1Q16 portfolio average rental reversion came in with an eye-popping 13.7% increase and portfolio shopper traffic grew 8% y/y, though investors are advised against getting too hyped up over these metrics as the strong reversions are likely to be one-off in nature due to tenant reconfiguration at Northpoint. 
  • The higher shopper traffic, primarily due to re-directed human traffic at Northpoint, did not translate to higher tenant sales, as management guided. 

 Sluggish Retail Sales starting to bite 

  • The sluggish Singapore retail sales over the past year is starting to manifest itself in the form of weaker portfolio occupancy rates and rising occupancy costs in SG malls. For FCT, tenant sales growth has been slowing trending down since 1Q15 when sales grew 4.8% vs c.1.9% for the latest quarter. 
  • Nonetheless, we note that even in 2009 when retail sales went down 2.4%, FCT was able to grow DPU by 3% without any acquisitions. This is testament to the strength and resilience of FCT’s suburban malls. 

 Northpoint AEI to put pressure on occupancy rates 

  • An 18-month long AEI (Asset Enhancement Initiative) for Northpoint due to start in 1H this year is expected to put pressure on occupancies in that mall for the period. 
  • Management guided that occupancy during this period is likely to average around 76% as some tenants will have to be relocated/closed during this period. 
  • Given that Northpoint contributes close to 30% of NPI in 1Q16, we expect Northpoint’s revenue and NPI to dip c.10% this year. 
  • Nonetheless, we are optimistic about the post AEI potential of the mall, given the track record of management. The previous major AEI to Causeway Point achieved an ROI of 13%. The AEI on Northpoint will focus on re-configuring the layout of the jaded-looking mall which will give rise to higher quality net lettable area with exposure to higher footfall brought about by the reconfiguration of the human traffic flow. 

 Short term pain, Long term gain 

  • The AEI to Northpoint will put pressure on revenue and net property income over the next two FYs. Nonetheless, we think this is a necessary step to improve the façade and facilitate the linkage of Northpoint to the upcoming Northpoint City which will also house North Park Residences, a 920-unit condominium development which has already seen 620 units sold, 3 years prior to completion. 
  • Management nonetheless has committed to strive to maintain DPU growth in FY16 despite this upcoming occupancy weakness, a proud record they have kept every year since IPO in 2007. At a current yield of 6.2%, we believe this potential weakness in DPU growth over the next two years has been factored in. There exists a slight room for yield compression downwards to the average of 5.7% over the past 5 years, or average of closer to 5.9% since mid-2013 when risk free rates started to climb to levels where we stand right now. 
  • We readjust some of our growth expectations for Northpoint over FY16 and FY17 as management shed more clarity on the expected disruptions. We are forecasting flat DPU over the next two years in light of this occupancy pressure, before growth resumes thereafter. 
  • We maintain our ACCUMULATE call on FCT, although with a lowered DDM-derived target price of S$2 from $2.07 previously.

Tan Dehong Phillip Securities | http://www.poems.com.sg/ 2016-01-22
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 2.00 Down 2.07