Frasers Centrepoint Trust - DBS Research 2016-07-18: Interest Savings Float Its Boat

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FRASERS CENTREPOINT TRUST J69U.SI 

Frasers Centrepoint Trust - Interest Savings Float Its Boat

• 3Q16 DPU flat at 3.04Scts despite NPI dip led by Northpoint AEI, due to tweaks in fees.
• Higher exposure to floating rates brings down cost of debt.
• Strong rental reversions at Causeway Point offsets decline in occupancy rate.
• Raised TP to S$2.29, maintain BUY.

Ability to maintain stable DPUs. 

• While many other S-REITs are expected to face declining DPUs over the next couple of years due to the slowing Singapore economy, FCT offers investors a steady DPU profile. This is made possible by FCT’s conservative strategy of paying the majority of its management fees in cash, which enables FCT to temporarily increase payment of fees in units to sustain DPU.

Near-monopoly of shopping malls in the north. 

• Northpoint and Causeway Point together contribute c.70% of FCT’s Net Property Income (NPI). While it is still 15 months away until Northpoint completes its AEI, we believe strong rental reversion at Causeway Point will support earnings and cushion any pressures from an otherwise declining occupancy rate.

Significant reduction in interest rate hedge brought down cost of debt. 

• The Manager has proactively reduced the percentage of borrowings hedged into fixed rates to 59% from 74%, to benefit from their view that interest rates may stay low for an extended period. As such, we have brought down our cost of debt assumptions due to expectations that rate hikes will be less of a probability compared to the start of the year.

Valuation:

• We have revised FCT’s TP higher to S$2.29 to S$2.10 on the back of lower cost of debt assumptions and higher-than- expected rental reversions from Causeway Point which more than offsets declining occupancy for FCT’s portfolio. 
• The stock offers a forward yield around 5.5% and a total potential return of > 13%. 
• Maintain BUY.

Key Risks to Our View:

• Near-term fall in NPI margin. As Northpoint’s average occupancy drops to 76% during its AEI period (Mar 2016-Sep 2017), some narrowing in portfolio NPI margin is expected.
• Interest rate risks. If expectations of rate hikes increase, the 41% exposure to floating interest rate will amplify the increase in the REIT’s cost of debt, putting pressure on valuation.

Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-07-18

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.29 Up 2.10