Frasers Centrepoint Trust - DBS Research 2016-10-24: Fruits from Floating Rates

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FRASERS CENTREPOINT TRUST J69U.SI

Frasers Centrepoint Trust - Fruits from Floating Rates

• 4QFY16 DPU 2.82 Scts, full-year DPU 11.76 Scts in line with our expectations.
• Tweaks in management fees and savings from floating rate debt compensated Northpoint’s AEI.
• Flat DPU in FY17, due to Northpoint’s AEI and large lease renewals in a uncertain retail climate.
• BUY, S$2.29 TP.

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, Frasers Centrepoint Trust (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 asset enhancement initiative (AEI), we believe strong rental reversion at Causeway Point will support earnings and cushion any pressures from any decline in occupancy rates.

Significant reduction in 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 to account lower interest expense in the near term.

Valuation

• DCF-based TP of S$2.29. The stock offers a forward yield around 5.5% and a total potential return over 10%. Maintain BUY.

Key Risks to Our View

Lease renewal in FY17. 

• We estimate that 39.6% of total gross rent will be due for renewal in FY17. Reversion rate at Northpoint will test tenant’s confidence in the mall after AEI, whereas tactical lease management at Changi City Point and Bedok Point will help in the repositioning of the two malls.

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/ 2016-10-24

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.29 Same 2.290