Frasers Centrepoint Trust - Maybank Kim Eng 2016-04-12: Financial flexibility saves DPU

FRASERS CENTREPOINT TRUST J69U.SI

Frasers Centrepoint Trust (FCT SP) - Financial flexibility saves DPU

We revise FY9/16-18 DPUs up 0.7%/0.9%/1.1% to 11.6/11.6/11.8 Scts based on compensating Northpoint’s impending vacancies due to AEI, by doubling fees taken in units. The exercise demonstrates the superior financial flexibility FCT has in coping with the disruption.
At the same time, yield targets have to be compressed in a negative rate, collapsing long bond yield environment. FCT is currently trading c.22bp below the -1SD of 6.1%.

To reflect our negative view on the retail scene, we re-peg FCT’s yield target to mid-way between the -1SD and the mean to arrive at 6.5% (previous 7%).
Applied to FY9/16 DPU, TP is revised +9% to SGD1.78. Maintain SELL.

We noticed that revenue in 1Q was flat (-0.2% YoY), dragged lower by ongoing tapering in occupancy rate (Dec15: 94.5% vs Mar15:97.1%).
While tenant remixing was cited, we note that such remixing is in response to strong island wide supply competition. Case in point is Northpoint’s impending AEI to prepare it to integrate with the upcoming Northpoint City. Management has guided that average occupancy at Northpoint could drop to 76% for the first 6 months of the 18 month AEI.
Financial flexibility saves DPU FY9/16-17 DPU could drop to 11.3/11.3 Scts due to the AEI, but we compensate for that by doubling the proportion of management fess taken in units from the usual 20% to over 40%, to maintain DPUs at 11.6 Scts, the same as last FY’s payout.

Our retail industry outlook is still a negative one, and this informs our slightly discounted yield targets. Supply is set to grow at a 2.4% CAGR 2016-18, concentrated in the Outside Central Region (4.2% CAGR).
While head-on competition is little, the burst of prime space reduces demand for incumbent prime assets. Simply put, tenants have more choice now, thus reversions will be slower, especially in a weak economy.
2015 saw retail space net absorption of -0.3m sf, nearly zero in the OCR, where vacancy has increased for three years now: 2.7%/3.7%/4.6% (2012-15).

Joshua Tan Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-04-12

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.78 Up 1.63