Frasers Centrepoint Trust - RHB Invest 2017-10-26: Now NEUTRAL As Positives Are Priced In

Frasers Centrepoint Trust - RHB Invest 2017-10-26: Now NEUTRAL As Positives Are Priced In FRASERS CENTREPOINT TRUST J69U.SI

Frasers Centrepoint Trust - Now NEUTRAL As Positives Are Priced In

  • Frasers Centrepoint Trust’s (FCT)’s suburban malls continued to register healthy positive rental reversions (FY17: +5.1%) despite a challenging retail climate. However, the rental growth did not come with higher shopper traffic and tenant sales, which continued to decline. 
  • Northpoint City North Wing (NCNW)’s occupancy rate is set to improve sharply in the coming quarter, as its AEI is almost completed. The opening of DTL-3 should also benefit Changi City Point (CCP)
  • While FCT has many potential near-term catalysts, we believe the strong +16% YTD rally in its share price indicates that most of the upside is already priced in. 
  • Downgrade to NEUTRAL, with a SGD2.24 TP (from SGD2.22, 2% upside).

Healthy rental reversion. 

  • Despite the soft retail environment, Frasers Centrepoint Trust’s (FCT) malls registered a positive rental reversion of +8.3% in 4QFY17 (Sep), reflecting the underlying strength of its well-located suburban malls. Causeway Point, which accounted for 51% of FY17 NPI, continues to be the key driver (rental reversion: 7.6%). 
  • For FY18, about 29.2% of leases (as a percentage of income) are due for renewal, for which we expect positive rental reversions of low- to mid-single digits.

Northpoint City North Wing (NCNW) to shape up well post asset enhancement initiative (AEI). 

  • The AEI at Northpoint City North Wing (NCNW) is almost complete, and the final expenditure is likely to be below its budget of SGD60m. Post-AEI, management noted that average rental is likely to be better than the estimated 9%. However, the reconfigured mall’s NLA is likely to drop by a higher 7.5% (original projection: 4%), offsetting some of the rental increase. 
  • With tenants progressively moving in, its occupancy rate has risen sharply to 81.6% as at end-4QFY17 (3QFY17: 65.9%). It is expected to cross 95% by end-2017.

Potential upside from Changi City Point (CCP) with completion of DTL-3.

  • Shopper traffic at Changi City Point (CCP) is set to improve with the recent opening of Downtown Line 3(DTL-3). 
  • We also expect CCP’s occupancy to improve (now at 88.5%) and see good positive rental growth from the better transport connectivity. About 36% of its leases (as percentage of total rent) are due for renewal in FY18, for which we expect mid-to-high single-digit positive rent reversions.

Acquisitions could be the next catalyst. 

  • FCT’s gearing remains relatively low, at 29%, providing ~SGD500m in debt headroom (assuming a comfortable level of 40%). We believe Waterway Point (one-third owned by sponsor Frasers Centrepoint Ltd) is a good fit to its portfolio in the near term and Northpoint City South Wing over the medium term. 
  • FCT is also looking at third-party assets in Singapore and could potentially expand to Australia at an opportune time.

Downgrade to NEUTRAL

  • Downgrade to NEUTRAL, with a DDM-based SGD2.24 TP (COE: 7.4%, TG: 1.75%) as we roll forward our DPU forecasts. 
  • While we see near-term catalysts, Frasers Centrepoint Trust's recent share price rally has factored in the upside. The weak retail demand, higher incoming retail supply and rising e-commerce also remain as threats. 
  • We maintain our earnings estimates. 
  • Key re-rating catalysts would be yield- accretive acquisitions and a continued positive momentum in retail sales.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-10-26
RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 2.24 Up 2.220