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

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?

3Q results in line, but cracks appearing

  • 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.

Vacancy drives Rev/NPI declines

  • 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.

Trouble at Changi City Point?

  • 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.

Compressed bond yields to raise TP

  • 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