Frasers Centrepoint Ltd - DBS Research 2017-11-14: Growth And Yield

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FRASERS CENTREPOINT LIMITED TQ5.SI

Frasers Centrepoint Ltd - Growth And Yield

• Frasers Centrepoint Ltd's FY17 core net profit rose 2% y-o-y from project completions in China and Australia.
• Sold close to 4k units in FY17 vs 4.9k units in FY16.
• Management is positive on Singapore residential and office markets and looks to replenish its land bank.
• Strong pipeline in undersupplied segments in Australia.

Growing developer with high dividend yield. 

• We maintain our BUY rating on Frasers Centrepoint Ltd (FCL) as valuations remain attractive at 0.8x P/NAV. The stock still lags the other large-cap developers, trading close to 1x P/NAV. 
• FCL's dividend yield remains the highest among developers at c.4%.

Where we differ: 

Poised to benefit from positive sentiment in Singapore property market; free-float improvement a wild card.

• We are the most bullish among consensus and we believe that FCL will benefit from the recovery in Singapore office market (Frasers Tower – one of the few office buildings in the CBD completing in 2018). Despite its diminishing land bank in Singapore, we believe that any potential land-banking activities will be a positive catalyst. 
• Earnings surprise and NAV upside might come from potential recycling of assets from Waterway Point, Northpoint City and industrial assets in Australia to its REITs which are not priced in at this moment.

Potential catalyst: 

Improved property sales, asset monetisation and improving free float and liquidity.

• Strong FY17 results led by completion of projects in China and Australia, and sale of properties. 
• FY17 net profit rose 15% y-o-y to S$689m, above expectations. Core net profit inched up 2% to S$488m, driven by higher recognition from completion of development properties (+25% y-o-y) in China and Australia, and sale of two student accommodation assets. 
• Close to 4,000 units of property sales were recorded in FY17 (FY16: 4,900).

Valuation

• We maintain our BUY rating; target price of S$2.35, implying a 1x P/NAV. 
• We have not incorporated newly acquired Geneba into our TP.

Key Risks to Our View

• Dependent on the outlook of the Australian real estate market and currency. The group derives an estimated 30% of PBIT from Australia, and returns could be impacted by the weakening AUD/SGD exchange rate.

WHAT’S NEW - Growth and yield 

Strong FY17 results from completion of development properties and sale of properties in Australia and China.

• Frasers Centrepoint Ltd (FCL)’s FY17 net profit rose 15% y-o-y to S$689m, above expectations. Excluding fair value changes and EI, net profit would have risen 2% to S$488m. The strong growth was driven mainly from its development properties (PBIT increased 25% y-o-y) from Australia (sale of student accommodation and completions), China (completions), Thailand (contributions from Golden Land and TICON, and UK/Europe (completions and some contributions from Geneba).
• In addition, FY17 recurring income segment’s PBIT increased 10% y-o-y to S$707m, mainly on contributions from hospitality segment from newly acquired Novotel Melbourne on Collins, Australia and Maritim Hotel Dresden, Germany, and higher contributions from The Centrepoint, Singapore post completion of AEI.
• Share of associates expanded 8% y-o-y and contributed 19% to the group’s PBIT before fair value and exceptional items.
• 4Q17 net profit improved by 12% y-o-y to S$248m. Excluding fair value changes and EI, net profit would have been S$53m vs S$211m in 4Q16. The weaker 4Q17 was mainly due to residential projects being mostly completed (hence, recognised) earlier in the first three quarters.
• FY17 EBIT margin was relatively stable at 22.4% vs 22.3% in FY16.

Segmental results: Development profits driven by completion of China and Australia properties and sale of properties; recurring income grew 10% y-o-y (details in the table below). 

• FY17 PBIT from development properties was up 25% y-o-y to S$472m led by
  1. Australia, due to sale of student accommodation and completions/settlement of residential projects,
  2. China, following completions of Phase 3C1 of Baitang One in Suzhou, China (100% sold), Phases 3A, 3B and 3C of Gemdale Megacity in Songjiang, China (almost fully sold),
  3. Thailand, from full-year contribution from Golden Land and maiden contributions from its associate, TICON, and
  4. UK/Europe, from completions and some contributions from Geneba.
• FY17’s PBIT for recurring income from investment properties (REITs and non-REITs) grew 10% y-o-y to S$707m mainly due to contributions from Frasers Hospitality Trust (+53%) with its newly acquired Novotel Melbourne on Collins, and Maritim Hotel Dresden in Australia and Germany, and higher recurring income from its Singapore portfolio (non-REIT +82% y-o-y) from higher contribution from The Centrepoint post AEI but partially offset by the absence of one-off fair value gain from Waterway Point recognised in 9M16.

Net debt-to-equity stood at 0.7x. 

• Net debt-to-equity (total equity including perpetual securities) and cost of debt remained relatively stable q-o-q at 3.0% vs 3.2% in 3Q17.

Sales volume largely driven by Seaside Residences; Australia residential facing headwinds. 

• Frasers Centrepoint Ltd recorded property sales of close to 4,000 units in FY17 vs 4,900 units in FY16. Despite the strong sales seen in Singapore ( > 900 units vs only 330 units in FY16) largely contributed by Seaside Residences ( > 500 units), China and Australia recorded lower property sales of -64% y-o-y and -22% respectively.
• Management expressed its optimism on the Singapore property market. Following the continued positive sentiment in the market, management plans to bid for sites to replenish its land bank. While the Australia property market has seen some softening, FCL plans to change its mix into more landed developments which is currently undersupplied and with less exposure to foreign purchase.

Unrecognised development revenue stood at S$3.4bn (vs S$3.1bn in FY16), mostly from Australia (S$2.2bn). 

• Projects that are expected to be completed FY18 include North Park Residences (92.7% sold), Parc Life (EC – 75% sold including options signed) in Singapore, residential properties mostly in NSW, Australia (largely > 90% sold), Gemdale Megacity (Phase 4F) in China (89.6% sold) and Baitang One (Phase 3B), Suzhou (15% sold).
  1. Singapore sales volume almost tripled mainly from sale of Seaside Residences which sold more than 500 units. We saw sales momentum in existing projects largely from Parc Life (EC) (75% take-up including options signed as at FY17 vs 29% in 3Q17) and North Park Residences (92.7% in 3Q17 vs 84.7% in 3Q17).
  2. China achieved sales volume of 611 units (vs 1,700 units in FY16).
  3. Australia’s FY17 sales volume fell 22% y-o-y to 2,200 units from 2,900 units in FY16. Property sales were mainly from projects in New South Wales and Victoria.
• Management targets to launch 2,000 units in FY18 and completions of more than 3,000 units. Unrecognised revenue stood at S$2.2bn as at 4Q17.

Northpoint City on track to open by December 2017; ongoing leasing for Frasers Tower. 

• In Singapore, the retail and office portfolio still achieved positive average rental reversions but marginally lower by 4.0% and 2.7% q-o-q respectively (4.7% and 1.6% in 3Q17) on relatively stable average occupancy rates of 92.6% and 81% (91% and 88% in 3Q17).
• Northpoint City has achieved TOP and expected to be fully open by the Christmas season. While rents for office space appears to have stabilised, management continues to see strong engagement and interests for its Frasers Tower.

Hospitality portfolio growth driven by new acquisitions. 

• In FY17, hospitality portfolio has enjoyed maiden contributions from new acquisitions, Novotel Melbourne on Collins and Maritim Hotel Dresden. While Frasers Centrepoint Ltd continues to see strong growth in Australia and Japan, management expects some weakness especially in the UK market and weaker GBP. 
• Frasers Centrepoint Ltd has opened seven out of the eight scheduled openings of new properties this year and signed nine new projects in Vietnam, Indonesia, Germany, Myanmar, Kuwait and Cambodia.

Maintain BUY; TP of S$2.35. 

• We maintain our BUY rating as valuations remain attractive at 0.8x P/NAV. The stock still lags the other large-cap developers, trading at an average of close to 1x P/NAV, despite the re-rating of its share price recently.
• Frasers Centrepoint Ltd's dividend yield remains the highest among developers at c.4%.
• Key catalysts include
  1. improved property sales across its major markets following a potential recovery/continued positive sentiment on the property market,
  2. potential asset monetisation from ongoing strategies to crystallise value across its portfolio including Northpoint and Waterway Point, and
  3. improved free float and liquidity in the market with the potential restructuring of TCC Group, Thai Beverage and group of companies.

Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-11-14

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.350 Same 2.350