Frasers Centrepoint Trust - OCBC Investment 2017-01-23: Robust rental reversions; slight uptick in DPU

Frasers Centrepoint Trust - OCBC Investment 2017-01-23: Robust rental reversions; slight uptick in DPU FRASERS CENTREPOINT TRUST J69U.SI

Frasers Centrepoint Trust - Robust rental reversions; slight uptick in DPU

  • 1QFY17 DPU up 0.7% YoY.
  • Positive rental reversions of 6.9%.
  • Balance sheet remains healthy.

1QFY17 results in-line with our expectations 

  • Frasers Centrepoint Trust (FCT) reported an inline set of 1QFY17 results. Gross revenue and NPI fell 6.4% and 5.7% YoY to S$44.1m and S$31.6m, and formed 24.0% and 24.5% of our full-year forecasts, respectively. This was largely due to loss of income from planned vacancies at Northpoint as a result of its ongoing AEI.
  • However, DPU inched up 0.7% YoY to 2.89 S cents and accounted for 24.6% of our FY17 projection. This was because the REIT Manager elected to take a larger proportion of management fees in units, while S$1.0m of income available for distribution was retained, versus S$1.4m in 1QFY16.

Expect Northpoint’s occupancy to trough in coming months 

  • Notwithstanding the headwinds facing Singapore’s retail sector, FCT managed to register a robust rental reversion of 6.9% for its portfolio. This was driven by Changi City Point (+12.2%) and Causeway Point (+10.6%), but partially offset by weakness at Bedok Point (- 10.1%) and Anchorpoint (-3.2%). 
  • Occupancy improved 1.9% QoQ to 91.3% as FCT completed phase 1 of its Northpoint AEI. Looking ahead, occupancy of Northpoint is expected to reach a trough of ~57%-58% for the months of Feb to Apr this year, before recovering as the AEI approaches completion.

Reiterate BUY 

  • We factor in FCT’s recent acquisition of the ten strata-titled ground floor retails units at Yishun 10 Cinema Complex in our model, and consequently raise our FY17 and FY18 DPU forecasts marginally by 0.3%. As a result of this acquisition, FCT’s gearing ratio increased slightly from 28.3% (as at end-FY16) to 29.7%, but remains one of the lowest amongst the S-REITs universe. 
  • Interest cover was also healthy at 7.3x, although its proportion of borrowings which are hedged or on fixed rates stood at 56%, as at 31 Dec 2016. 
  • Given a steeper yield curve environment, we raise our risk-free rate assumption from 2.4% to 2.7%, which consequently lowers our fair value estimate from S$2.33 to S$2.28. However, we are keeping our BUY rating on FCT, as we continue to like its resilient portfolio and attractive FY17F distribution yield of 6.0%.

Andy Wong Teck Ching CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-01-23
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 2.28 Down 2.330