Frasers Centrepoint Trust - RHB Invest 2017-07-25: Uplift Ahead From Northpoint AEI Completion

FRASERS CENTREPOINT TRUST J69U.SI

Frasers Centrepoint Trust - Uplift Ahead From Northpoint AEI Completion

FCT’s 3QFY17 results were in line.
We expect earnings to improve in the coming quarters with the completion of AEI’s at Northpoint (Sep 2017). Additionally, Changi City Point’s occupancy and rents are projected to improve with the expected opening of DTL3 in October.

While weakness were seen in Bedok Point and Anchorpoint, both malls together contributed < 7% NPI and the effect should be offset by the strong performance at its core suburban malls.
With its gearing remaining low at 30%, we see room for an acquisition-led growth in the near-term.
Maintain BUY with an unchanged TP of SGD2.22 (4% upside).

Frasers Centrepoint Trust’s (FCT) 3QFY17/9MFY17 DPU declined 1.3% and 0.2% YoY respectively. This was mainly due to lower contributions from Northpoint, which is currently undergoing an asset enhancement initiative (AEI).
The results were in line, accounting for 25% and 75% of our full-year forecasts respectively.
Gross revenue (3Q) declined 3.3% YoY while net property income (NPI) declined by a lower 1.3% YoY due to property tax write backs.
About 70% of the management fees were paid in units compared to 50% during the same period last year.

3QFY17’s rent reversion was a slight positive at 0.4% YoY, dragged down by Bedok Point (-30.2%) and Anchorpoint (-6.1%). However, its core suburban malls Causeway Point (+5.8%), Northpoint (+3.8%) and Changi City Point (+8.3%) continued to record healthy positive reversions.
With the bulk of lease expiries ahead (FY17-18) coming from its core suburban malls, we expect rent reversion to stay positive in the mid-single digit.
Shopper traffic (excluding Northpoint) increased 3.7% YoY while tenant sales (excluding Northpoint) declined 3.9% YoY.

Northpoint occupancy for the quarter came in at ~59.3% lower than management guidance (~64.7%) due to tenant transition. With bulk of AEI work completed, occupancy is projected to increase ~73.5% for the current quarter and further stabilise with the expected completion of the AEI in September. > 90% of the reconfigured areas have been pre-committed.
Post AEI, the mall’s NLA is expected to decline by 4%. However, FCT noted that the average uplift in the mall’s gross rents is likely to exceed its targeted 9% increase.

Occupancy at Changi City Point declined 5.7% QoQ to 84% due to the relocation of its food court premises. The occupancy has – since 1 Jul – improved to 87.4%. Management noted that its shopper traffic and tenant sales have been picking up and are expected to further improve with the expected opening of the Downtown Line 3 (DTL3) in October.

With its gearing remaining modest at 30% providing healthy debt headroom (~SGD500m), management has been actively looking at acquisition opportunities, mainly in Singapore and Australia.
Potential acquisition targets are Waterway Point – a one-third stake is owned by sponsor Frasers Centrepoint (FCL) – in the near term and Northpoint City in the medium term.
FCT also sees the possibility of opportunistic third party acquisitions in the current market as smaller players look to exit amid a tough retail climate.

While the retail environment remains challenging, FCT’s strong suburban mall portfolio and pro-active management team should be able to wither the challenges.
Its low gearing also provides headroom for an opportunistic acquisition-led growth in the near-term.
The stock offers FY17F-18F yields of 5.6% and 6% respectively.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-07-25

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 2.220 Same 2.220