Frasers Centrepoint Trust (FCT SP) - Maybank Kim Eng 2018-04-25: Suburban Strength

Frasers Centrepoint Trust (FCT SP) - Maybank Kim Eng 2018-04-25: Suburban Strength FRASERS CENTREPOINT TRUST J69U.SI

Frasers Centrepoint Trust (FCT SP) - Suburban Strength

    Strong results, our preferred retail pick

    • Frasers Centrepoint Trust (FCT)’s 2Q18 DPU of SGD3.10cts, up 2.0% y-o-y / 3.3% q-o-q, was driven by healthier occupancies, stronger rental reversions and the Northpoint City North Wing post its AEI. 
    • Following in-line results, we keep our forecasts and DDM-based SGD2.55 Target Price (WACC: 6.9%, LTG: 2.0%) intact. 
    • While we remain cautious on retail REITs given structural challenges from e-commerce disruption and sales leakage, we prefer FCT for its strengthening suburban mall footprint, visible growth drivers, and potential acquisition catalysts. 
    • BUY.

    Higher occupancies, +9.1% portfolio rental reversion

    • FCT’s 2Q18 revenues and NPI jumped 6.3% y-o-y and 6.9% y-o-y respectively, on better occupancies, which rose q-o-q and y-o-y to 94.0%, and a +9.1% portfolio rental reversion. 
    • The stronger rental reversions were led by Causeway Point (+18.9% from the renewal of an anchor tenant lease signed 5-6 years earlier), Changi City Point (+6.2%) and YewTee Point (+5.7%). Bedok Point (1.6% of its NPI) remains the only weak asset, with occupancy down q-o-q and y-o-y to 77.8% with a -12.5% rental reversion. 
    • Excluding Northpoint City North Wing, shopper traffic was up 0.5% y-o-y, largely due to the +3% y-o-y for Causeway Point and Changi City Point. While portfolio tenant sales slowed by 1.2% y-o-y, management shared that occupancy cost for the Oct 2017 to Feb 2018 period had improved by about 1% from the 16.7% in FY17, to support a recovering rental outlook.

    Northpoint City in its ramp-up phase

    • Northpoint City North Wing saw revenues/NPI jump 31.7% y-o-y/44.8% y-o-y post its AEI, with occupancy up y-o-y from 60.7% to 94.0% as of Mar 2018. Management attributed the -6.1% rental reversion to tenant adjustments in the first renewal cycle. 
    • With shopper traffic set to improve with the asset’s increasing relevance as a destination mall, management was confident of achieving a 9% increase in rentals for new leases.

    Valuations undemanding, supported by growth

    • Following the completion of AEI at Northpoint City, we see support on valuations – DPU yield, now close to the 11-year historical mean - have not fully priced in the stronger rental reversions and possible upside from acquisitions.

    Swing Factors 


    • Earlier-than-expected pick-up in leasing demand for retail space driving improvement in occupancy. 
    • Better-than-anticipated rental reversions. 
    • Accretive acquisitions or redevelopment projects. 


    • Prolonged slowdown in economic activity could reduce demand for retail space, resulting in lower occupancy and rental rates. 
    • Termination of long-term leases contributing to weaker portfolio tenant retention rate. 
    • Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.

    Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-04-25
    SGX Stock Analyst Report BUY Maintain BUY 2.550 Same 2.550