Frasers Centrepoint Trust - DBS Research 2018-04-26: Dominance In The North

SGinvestors.io

FRASERS CENTREPOINT TRUST J69U.SI

Frasers Centrepoint Trust - Dominance In The North

• 2Q18 DPU of 3.10 Scts is a new record.
• Operational metrics trending higher; lower gearing empowers the REIT with acquisition capacity.
• Estimates tweaked slightly to account for higher interest costs.
• Yields of close to 6.0% remains attractive.

Northpoint AEI to elevate growth; BUY, Target Price adjusted to S$2.45.

• All of Frasers Centrepoint Trust (FCT)’s properties are suburban malls that generate a resilient income stream across market cycles. 
• A low gearing of < 30% opens up a myriad of acquisition possibilities, especially from the Sponsor with two income-producing assets that could be injected in the medium term. 
• Offering attractive yields of > 5.5%, we maintain our BUY call. 

Where we differ: Our Target Price is among the street high.

• We are among the most optimistic compared to street average as we firmly believe on the REIT’s ability to deliver on accretive acquisitions on the back of an improving macro backdrop. While our earnings are adjusted downwards by 2%-5% to account for
  1. higher medium term interest rates, and
  2. higher proportion of management fees paid in cash, 
• we still see attractive DPU growth of close to a 4% CAGR. 

Potential Catalyst:

• Acquisition of Waterway Point or Northpoint City South Wing which are not priced into consensus estimates. 

2Q18 results in line. 

• It was another record quarter for the REIT, with DPU of 3.1 Scts. With operational metrics are trending up and gearing inching down, we see improved financial flexibility for the group to undertake acquisitions, which we believe will be well received by investors. 

Valuation: 

• Target Price adjusted to S$2.45 as we raise interest cost assumptions. 
• Maintain BUY; total potential return is c.16% inclusive of share price upside and 5.6% 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 - Record Quarter

Another record quarter.

• Frasers Centrepoint Trust's 2Q18 DPU of 3.10 Scts, up 2.0% y-o-y (2Q17 DPU: 3.04 Scts), is a new record. This came on the back of a 6.3% rise in Gross Revenue to S$48.6m and 6.9% rise in net property income of S$34.8m. 
• The stronger performance is mainly driven by revenues from Causeway Point, (revenues +1.3%) and Northpoint (revenues +31.7%), which offset the dip at Changi City Point (-3.6%), Bedok Mall (- 17.9%), and Yew Tee (-3.6%). 
• Performance from the smaller malls continue to remain mixed from the ongoing tenant churn amid the current challenging operating climate.

Improving metrics.

• Portfolio occupancy rates improved slightly to 94.0% from 92.6% q-o-q, mainly from higher occupancy rates at Northpoint City North Wing, which rose to 94.0% (vs 86.8% in the last quarter) upon completion of the asset enhancement initiative. Northpoint City North Wing is expected to continue ramping up in the subsequent quarters as operations stabilise. 
• Part of the vacancy was also from Yishun 10, where previous tenants moved into Northpoint City and the manager is now actively marketing the space vacated.

Stable tenant sales.

• 2Q18 shopper traffic, excluding Northpoint City North Wing, was up 0.5% y-o-y. Portfolio tenant sales dipped slightly by 1.2% in the current quarter. 
• Rental reversions came in strongly at 9.1% (1H18 reversions at 3.9%), mainly due to a 18.9% spike in reversions at Causeway Point, which mainly came from the renewal of an anchor tenant, which accounted for 78% of the space renewed during the quarter. 
• We saw weakness at Northpoint City North Wing (-6.1%) and Bedok Point (-12.5%), attributed to rental adjustments for tactical reasons in order for the Manager to maintain occupancies.

High retention rate expected as the REIT has always kept occupancy costs manageable.

• Looking ahead, only 9.1% of the portfolio leases will be up for renewal in 2HFY18, of which a majority of the leases will come from Yew Tee Point (35% of the Mall’s gross rent) and Causeway Point (14.8% of mall’s total rent). 
• We expect high retention ratios for both malls and stable and low-to-mid single digit reversions based on our view that the REIT has always kept occupancy costs manageable at 16%-18%, which enables tenants to remain operating at a fairly healthy level.

Strong balance sheet metrics.

• Gearing was 29.2% as at 31 March 2018 (31 Dec 2017: 29.4%) with 56% of the cost fixed via interest rate hedges, minimising the impact of rising interest rates on distributions. 
• With ample debt capacity of up to S$800m to fund potential acquisitions, we believe that the REIT is empowered to grow inorganically when the Sponsor is ready to divest (Waterway Point or Northpoint City South Wing).

Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2018-04-26

SGX Stock Analyst Report BUY Maintain BUY 2.45 Down 2.480