Frasers Centrepoint Ltd - CIMB Research 2016-05-10: - A case of two halves

Frasers Centrepoint Ltd - CIMB Research 2016-05-10: - A case of two halves FRASERS CENTREPOINT LIMITED TQ5.SI 

Frasers Centrepoint Ltd - A case of two halves

  • 2QFY16 core net profit below our expectation, making up 18% of our full-year forecast. An interim DPS of 2.4 Scts proposed.
  • Singapore residential the star performer but slim margins a drag on growth.
  • Australia and China residential income to be back-loaded this year.
  • Exploring new logistics and industrial REIT; potential to pare down gearing.
  • Maintain Add, with a slightly lower target price of S$2.03.

Drag from slower Australia and smaller one-offs

  • 2QFY9/16 net profit of S$123.3m (-14% yoy) was slightly below our expectation but largely in line with market estimates. 
  • Excluding one-offs, core net profit would have been S$110.3m (+11% yoy), achieved through a doubling in topline to S$898m, thanks to higher Singapore and UK residential, greater hospitality earnings and S$14m gain from divestment of an associate, but a compression in PBIT margins to 25.2% (44.8% pts) led to a moderated bottomline performance.

Underpinned by Singapore residential contributions

  • Residential PBIT surged 54% yoy to S$118.6m, driven by Twin Fountains EC (recognised 100% of contribution) and progressive billings from North Park Residences in Singapore, and completion of the Riverside Quarter Block 5C in UK. These more than offset the slower completions in China (only 159 units billed in 1H). 
  • We expect back- loaded profits from the latter, with 2,142 units sold and scheduled to be completed in 2H. 
  • Hotel contributions rose due to Malmaison Hotel du Vin Group in UK acquired in Jun 15.

Australia residential income to be back-loaded

  • FPA PBIT fell 21% in 2QFY16 to S$21.7m with income largely coming from rentals and C&I developments, and partly filled the income vacuum from residential. Only 750 units were billed in 1HFY16; there are another 2,000 units to be settled in 2HFY16. 
  • Meanwhile, sales continued to be robust with 1,457 units sold in 1HFY16 and another 1,850 units to be marketed in 2H. 
  • Unrecognised billings of S$2bn should provide income visibility over the next 2-3 years.

Exploring new logistics REIT, potential for paring down debt

  • FCL had recently stated that it is exploring the possible listing of a logistics and industrial REIT. 
  • FCL’s portfolio of Australian logistics and industrial assets is currently valued at a 7.47% cap rate. 
  • We believe the group would likely enjoy some cap rate compression when monetising this portfolio. If successful, we think this would enable the group to recycle capital or pare down its gearing, which currently stands at 0.875x, relatively high compared with its peers.

Maintain Add

  • We cut our FY16-18 earnings by 10-29% as we review our property development and completion schedule assumptions. 
  • We keep our Add rating with a lower TP of S$2.03, pegged to 30% discount to RNAV. 
  • We continue to like FCL for its good income visibility with S$3.6bn of locked-in unrecognised residential billings and high proportion of recurrent rental income. 
  • The REIT spin-off could act as a near-term re-rating catalyst while any increase to its current small free float of 12% could be a medium-term catalyst.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-05-10
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 2.03 Down 2.04