Frasers Centrepoint Trust - DBS Research 2018-10-25: Isle Of Safety

FRASERS CENTREPOINT TRUST (SGX:J69U) | SGinvestors.io FRASERS CENTREPOINT TRUST (SGX:J69U)

Frasers Centrepoint Trust - Isle Of Safety

  • Frasers Centrepoint Trust’s FY18 DPU of 12.015 Scts (+1% y-o-y) a new record.
  • Disappoints slightly on higher one-off expenses, but resilient suburban exposure and low gearing prime FCT for the future.
  • Target Price adjusted to S$2.35 after moderating growth expectations and raising interest cost assumptions
  • Maintain BUY; attractive c.5.6% yield with upside from acquisitions.



Consistency is key; maintain BUY with adjusted Target Price of S$2.35.

  • Frasers Centrepoint Trust (FCT)’s record FY18 marks 12 consecutive years of DPU growth – a remarkable feat. However, after years of strong rent reversions at its anchor malls, we believe that stability will likely take centre stage for now as the Manager prepares its portfolio for the future. Its multi-year DPU growth path is set to continue, albeit at a more moderate pace, as higher interest costs kick in.
  • Frasers Centrepoint Trust’s low gearing of > 29% 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 c.5.6%, and potential for upside surprise, we maintain our BUY call.



Where We Differ:

  • Despite moderated growth expectations, we continue to like the REIT for its suburban exposure. All of Frasers Centrepoint Trust’s properties are suburban malls, which have proven to be resilient across market cycles.
  • While our near-term DPU growth expectations are adjusted downwards from 3-4% to 1-3% to account for
    1. higher interest rates,
    2. higher proportion of management fees paid in cash, and
    3. a more balanced rent outlook,
    we believe the merits of its resilient portfolio and low gearing should continue to draw interest in the stock.


Potential catalyst:

  • Given expectations of moderating organic growth outlook, we believe that an acquisition of Waterway Point, if it materialises, will help revitalise growth.


4Q18 results slightly below.

  • While DPU of 2.862 Scts disappointed slightly on higher one-off expenses, operational improvements for its weaker-performing malls instils confidence that the worst may be over for retail S-REITs.


Valuation:

  • Target Price adjusted to S$2.35 as we
    1. raise interest cost assumptions and
    2. moderate growth expectations.
  • Maintain BUY; total potential return is c.12% inclusive of share price upside and 5.5% forward yield.


Key Risks to Our View:

  • Interest rate risks. Exposure to floating REIT’s finance cost, thereby pressuring DPU creep up unexpectedly.


WHAT’S NEW


4Q18 DPU of 2.862 Scts.

  • Frasers Centrepoint Trust reached a new record quantum fell slightly below our/consensus estimates of 12.4 Scts/12.2 Scts by 3.1%/1.5% respectively.
  • The weakness in higher maintenance (+15.2% y-o-y) and other property expenses (+15.5% y-o-y) offset the modest growth in gross revenues (+0.5% y-o-y).
  • Some of the higher costs are one-off in Causeway Point ahead of its Northpoint City North Wing.
  • We also note the lower proportion of management fees paid 7 year ago.
  • Reflecting the higher the quarter, NPI margins fell to 67.8% (4Q18) vs 71.7% (4Q17).

Rental reversions remained in (slight) positive territory.

  • Uptick in portfolio occupancy from 94% to 94.7%, led by broad-based improvements in take-up rates (particularly Northpoint City). Occupancy levels for Northpoint City were the most improved, rising sequentially from 92.5% (3Q18) to 96.5% (4Q18), implying that recovery for the Yishun 10 retail podium is underway.
  • While the pace of rental reversions moderated further in 4Q18, it remained in slight positive territory of c.0.2% with c.4.1% of portfolio NLA renewed over the quarter. This brings the portfolio average rental reversions for FY18 to c.3.2%.
  • Overall, rental reversionary trends were fairly mixed across Frasers Centrepoint Trust’s portfolio as larger malls continued to deliver positive reversions of between +0.5% and +2.4%.
  • Meanwhile, signing rents at the smaller malls continued to suffer as strategies to shore up occupancy rates took precedence. Negative reversions stood at -10.4% and -23.3% for Bedok Point and Anchorpoint respectively.

Outlook

  • Retail sales index (excluding motor vehicles) increased 2.4% y-o-y in August 2018.
  • Going into FY19, the Manager anticipates the performance of its malls to lead to an acceleration in its growth profile.
  • Underlying trends at Frasers Centrepoint Trust’s malls are also supportive in shopper traffic (excluding Northpoint City).





Carmen TAY DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-10-25
SGX Stock Analyst Report BUY MAINTAIN BUY 2.35 DOWN 2.450



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