Frasers Centrepoint Trust - Maybank Kim Eng 2018-10-25: Preferred Retail Play

FRASERS CENTREPOINT TRUST (SGX:J69U)

Frasers Centrepoint Trust - Preferred Retail Play

We hosted an NDR for Frasers Centrepoint Trust (FCT) in Singapore following its 4Q18 results.
Key highlights include:
1. discussions about its 4Q/FY18 operational performance;
2. positive growth outlook for its malls; and
3. potential acquisition opportunities.

We marginally lowered FY19E/20E est.’s (1-2%) following an operationally strong quarter and introduced FY21. Our DDM-based SGD2.55 Target Price (COE: 7.0%, LTG: 2.0%) is unchanged.
We continue to prefer Frasers Centrepoint Trust for its strengthening suburban mall footprint, visible growth drivers and potential acquisition catalysts. BUY.

Excluding FRS 17 and 39 accounting adjustments, 4Q18 revenue and NPI grew 5.3% y-o-y and 1.4% y-o-y.
Property expenses rose 14.3% y-o-y on higher utility costs, carpark-related expenses at Anchorpoint (from FY18) and one-off items (professional fees, ad-hoc maintenance).
Operationally, NPI at Northpoint (NCNW) and ChangiCity Point (CCP) jumped 12.7% y-o-y and 11.7% y-o-y on stronger occupancies, up from 92.5% to 96.5% at Northpoint (NCNW) and 92.6% to 93.8% at ChangiCity Point.
Portfolio occupancy improved to 94.7% with stronger performance across all malls except for Causeway Point (CWP) due to transitional vacancies.
Excluding NCNW, shopper traffic rose 5.0% y-o-y, while tenant sales accelerated to +3.6% y-o-y (from 3.4% y-o-y in 3Q18).

Rental reversion was slower at +0.2% from +5.0% in 3Q, bringing full-year to +3.2%. Reversions were slower at Causeway Point (+1.3%) from deliberate tenant remixing while Bedok Point was weak at -23.3%.
Its occupancy should improve to 85% in 1Q19 as a new restaurant opens; management shared that rents have likely bottomed out. Meanwhile its Anchorpoint vacancy has been backfilled by a new F&B tenant set to open in 1Q 2019.
Expiring leases in FY19 are concentrated at Causeway Point (37.9%) and Anchorpoint (54.7%). They are mostly anchor tenants and food courts, with low renewal risk. We see stronger rental growth upside at Causeway Point from underlying demand.

Its low 28.6% gearing and estimated SGD500m debt headroom (at 40% gearing) will support acquisitions.
Frasers Centrepoint Trust’s sponsor pipeline assets – the Northpoint City’s South Wing and Waterway Point (33% interest, now in its first lease renewal cycle) could strengthen its suburban mall footprint, while expansion into Australia is further down the road.

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 Research | https://www.maybank-ke.com.sg/ 2018-10-25

SGX Stock Analyst Report BUY MAINTAIN BUY 2.550 SAME 2.550