FRASERS CENTREPOINT TRUST
J69U.SI
Frasers Centrepoint Trust - Optimism Ahead
- Frasers Centrepoint Trust's 1Q18 DPU up 3.8% as Northpoint is returning to full operation post AEI completion in Sep 2017. Occupancy continues to improve.
- Management fee payout structure will normalise at the end of FY18.
- Raised forward DPUs on more optimistic rental growth outlook for key assets; Target Price raised to S$2.48.
Northpoint AEI to elevate growth; BUY, Target Price raised to S$2.48.
- All of Frasers Centrepoint Trust (FCT)’s properties are suburban malls that generate a resilient income stream. This was proven by the positive annual rental reversion achieved during the last two years while the rest of the market saw only flat rental growth.
- Its largest assets, Causeway Point and Northpoint, contribute c.70% of Net Property Income (NPI) and are local monopolies as there are currently no comparable competitors in the northern region of Singapore. In addition, the just completed AEI at Northpoint in September 2017 should dissipate downside risk to earnings and elevate distribution growth.
- We raised our rental growth assumptions at key assets over the next few years, and we lifted Target Price by 4.7%as a result.
Where we differ: our Target Price is 7% higher than street average.
- We are more optimistic than the street as we are forecasting 7% (vs consensus 2.5%) increase in DPU in FY18 as Northpoint returns to full operations, and c.4-5% DPU growth p.a. in the next couple of years, whereas consensus believes DPU will stay flat.
- Given the enlarged footprint and lack of supply in the north of Singapore, Frasers Centrepoint Trust retains its bargaining power in the region.
Potential Catalyst: Acquisition of Waterway Point.
- The acquisition of a one-third stake in Waterway Point from Sponsor Frasers Centrepoint Limited will fuel further upside to earnings. Frasers Centrepoint Trust’s low gearing of c.30% avails the Trust with the financial muscle to fund the acquisition.
Valuation
- Target Price raised from S$2.37 to S$2.48 as we adjust rental reversions higher at key assets.
- Maintain BUY; total potential return is c.13% inclusive of 5.4% forward yield.
Key Risks to Our View
- Interest rate risks. The relatively high exposure to floating interest rates could increase the REIT’s finance cost, thereby pressuring DPU, should interest rates creep up unexpectedly.
WHAT’S NEW
- DPU in 1Q18 was up 3.8%, highest 1Q DPU in history, thanks to Northpoint as it returns to full operation after completion of AEI
Positive DPU growth as Northpoint is now operational.
- 1Q18 DPU was 3.00 Scts, up 3.8% y-o-y.
- Gross revenue increased by 8.7% (or S$3.8m) y-o-y increase in gross revenue to S$47.9m, mainly due to the recovery in revenue from Northpoint City North Wing which completed its major AEI in September 2017.
- Net property income (NPI) was 9.1% or S$2.9m higher at S$34.5m. 1Q18 DPU represents 23.6% of our full-year forecast, in line with our expectations as we believe earnings will catch up in the next three quarters as occupancy at Northpoint recovers.
Portfolio occupancy continued to improve as Northpoint recovers.
- Portfolio occupancy was high at 92.6%, slightly up from 92.0% a quarter ago, thanks to the improvement at Northpoint as the occupancy increased from 81.6% to 86.8%. Causeway Point also saw a slight increase in its occupancy from 99.5% to 99.9%. Changi City Point had some frictional vacancy and occupancy dropped from 88.5% to 86.0%.
- Although still positive, rental reversion at the portfolio level slowed down to 1.0% as 8.8% of portfolio NLA was renewed over the quarter. The disappointment was mainly caused by the continuing weakness at Bedok Point where reversion was down 31.2%, excluding which, portfolio reversion would have been up 3.3%. Most of the other assets posted healthy reversion rates with Causeway Point leading at 5.5%.
- We advise investors not to place undue attention on Bedok Point as its contribution to portfolio NPI is only around 2%, and we believe the improvement at Northpoint will be more than sufficient to offset this weakness.
Gearing ratio increased slightly to 29.4% from 29.0%, as total borrowings increased to S$814m from S$798m.
- Cost of borrowing was steady at 2.4% (vs 2.3% last quarter).
- Attention needs to be paid to its still low level of fixed interest rates at 55%, which is much lower than the market average at above 70%. While FCT enjoyed the benefit of lower cost of borrowing, unexpected interest rate hikes could place pressure on DPU or lead to higher hedging cost.
Management fees payable in units to normalise at 80%.
- As Northpoint’s AEI has completed and its occupancy improves, the mall will very soon return to full operations. Eventually, earnings towards late FY18 will no longer be disrupted. As a result, the temporary increase in management fees payable in units will normalise to the pre-Northpoint AEI level.
- We have assumed the proportion of management fees payable in cash to increase from 30% in 4Q17 to 80% by the end of FY18; the percentage paid in cash in quarter was 50%.
Northpoint AEI – it only gets better from now.
- The 18- month AEI, which commenced in March 2016, was completed in September 2017. The mall is in its final stage of integration works with Northpoint City South Wing.
- Occupancy has recovered from its low of around 54% to the current level of 87%. Pre-committed occupancy is expected to be north of 90% and the 9% uplift in rentals compared to pre-AEI levels has been achieved, in line with expectations.
OUR VIEW
Raise Target Price to S$2.48 on the back of more positive rental growth prospects at Northpoint and Changi City Point.
- We had previously penciled in conservative estimates of rental reversion of around 2% p.a. at FCT’s key assets, namely Causeway Point, Northpoint North Wing and Changi City Point, due to the muted retail outlook in Singapore. While the general recovery of shopping malls in Singapore is still yet to be seen, the oversupply situation is less in the areas where FCT’s key assets are located.
- On the other hand, FCT’s monopolistic position in the northern region of Singapore, as well as the revival of Changi City Point, enabled FCT to post better-than-expected rental reversions at these key assets in the last two years, amid an otherwise challenging retail environment. This proved the exceptional quality of the assets. As such, we raised the annual rental reversion from 2% to 3-4% at Northpoint and Changi City Point in the next five years, and to 3% at CWP for FY18. As these assets contribute c.90% of FCT’s NPI, forward DPUs were uplifted by around 3% after FY22F.
Maintain BUY, Target Price lifted to S$2.48.
- As such, Target Price was increased by 4.7% from S$2.37 to S$2.48. Maintain BUY, given total potential return exceeding 13%.
Singapore Research Team
DBS Vickers
|
Derek TAN
DBS Vickers
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http://www.dbsvickers.com/
2018-01-24
DBS Vickers
SGX Stock
Analyst Report
2.48
Up
2.37
