Frasers Centrepoint Trust - Maybank Kim Eng 2016-07-18: Trouble at Changi City Point?

FRASERS CENTREPOINT TRUST J69U.SI

Frasers Centrepoint Trust (FCT SP) - Trouble at Changi City Point?

Results are in line.
We continue to expect flat DPUs for FCT (slight tweak 0%/-0.7%/-1.5%): Causeway Point, Northpoint post AEI, Anchorpoint and Yew Tee Point are incumbent malls with strong catchments and little competition, they are likely to hold their own; but strong supply conditions may affect malls with lesser positioning: Changi City Point and Bedok Point.

Maintain SELL, TP revised to SGD 1.90 (+6.7%) as we lower our yield target to 6.1% (-1SD), to reflect global bond yield compression.

3Q revenue and NPI dropped 4.4%/5.1% YoY as occupancy declined (90.8%, -1.2ppt QoQ, -5.7ppt YoY), offsetting positive rent reversions (+8.3%).
Rise in vacancy was mainly attributed to the impact from Northpoint’s asset-enhancement initiative that started last quarter, as well as transitional vacancy from Changi City Point. These negatives offset impressive rent reversions at Causeway Point (+9.4%), which accounted for 67% of portfolio renewals in the quarter.
Despite this, DPU was maintained at 3.04 Scts (flat QoQ and YoY) as FCT dipped into SGD2.1m of previously undistributed income.

Results are largely to expectations (9M results c.75% forecasts), as medium-term pain from Northpoint’s AEI was well anticipated. But the on-going difficulties at CCP were less so; vacancy there cratered to 81.3% vs 89.3% in 2Q.
Transitional vacancy is understandable, but CCP’s occupancy when first purchased by FCT in 3Q14 was 97.7%; it has been in steady decline since.
CCP may be having difficulty differentiating itself as it lacks a strong residential catchment, and Changi Business Park does not appear to be providing enough of an office crowd throughput.
Come 2018, it will also face formidable competition in Project Jewel.

In SREIT Strategy: To flow or not to flow, we highlighted that REITs globally are a cheap asset class relative to bonds, and SREIT yields are the most attractive among developed markets.
In an environment of heightened risks to growth, global bond yields have further compressed, supporting the case for further SREIT yield compression.
We tighten FCT’s yield target to 6.1%, 1SD below the mean, from 6.5% previously.

Joshua Tan Maybank Kim Eng | Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-07-18

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.90 Up 1.78