Frasers Centrepoint Trust - DBS Research 2019-01-22: Hungry For More

FRASERS CENTREPOINT TRUST (SGX:J69U)

Frasers Centrepoint Trust - Hungry For More

Frasers Centrepoint Trust’s 1Q19 DPU of 3.02 Scts (+0.7%) in line.
Operating performance tracks ahead - reversion of +11.1% for crown jewel Causeway Point prompts relook at Frasers Centrepoint Trust’s long-term DPU growth profile.
Target Price raised to S$2.40 as the strong rent momentum exhibited in 1Q19, if sustained, augurs well for future cashflows.
Maintain BUY; offers attractive c.5.5% yield with upside from acquisitions.

Consistency proved to be FRASERS CENTREPOINT TRUST (SGX:J69U)’s strong suit, as it continued to deliver stable DPU growth in 1Q19. While stronger-than-expected rent momentum (which augurs well for future cashflows) prompts a relook at Frasers Centrepoint Trust’s organic growth profile, we believe an acquisition may also be on the horizon – driving further upside, if it materialises.
We note that Frasers Centrepoint Trust’s low gearing of c.29% opens up a myriad of acquisition possibilities, especially from the Sponsor’s two income-producing assets in Singapore.
Offering attractive yields of c.5.5%, and potential for upside surprise, we maintain our BUY call.

We continue to like Frasers Centrepoint Trust for the defensive attributes of its suburban exposure. All of Frasers Centrepoint Trust’s properties are suburban malls, which have proven to be resilient across market cycles.
While we anticipate
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, given volatile times.

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

Target Price raised to S$2.40 as improving rent performance could help defray the onset of higher interest costs - and keep Frasers Centrepoint Trust on a firm growth path.
Maintain BUY; total potential return is c.13% inclusive of share price upside and 5.5% forward yield.

Interest rate risks. Exposure to floating interest rates could increase the REIT’s finance cost, thereby pressuring DPU, should interest rates creep up unexpectedly.

Frasers Centrepoint Trust’s steady DPU growth trend continued in 1Q19, rising 0.7% y-o-y to 3.02 Scts, which was in line.
Net investment income grew 2.9% y-o-y to S$26.8m as costs kept pace with the increase in gross revenues.
Changi City Point was the star performer this quarter, which saw a c.19% jump in NPI on the back of a 12.6% increase in revenues – a culmination of several years of tenant remixing initiatives undertaken by the Manager.
However, net investment income came in lower at S$27.7m vs S$28m a year ago, mainly on the lower proportion of management fee paid in units.
Partly lifted by earnings retained from previous quarters, distributions to investors increased 0.9% y-o-y to S$28m.

Portfolio rental reversions averaged at +6.9% as Causeway Point impressed with strong reversions of +11.1%.
However, rental reversionary trends remained fairly mixed across Frasers Centrepoint Trust’s portfolio as malls largely continued to perform, while signing rents at smaller malls continued to suffer (particularly Bedok Point) in favour of higher occupancies.
This was evidenced by the uptick in Frasers Centrepoint Trust’s portfolio occupancy, which reached a three-year high of 96.4% in 1Q19 vs 94.7% in the previous quarter, led by broad-based improvements across portfolio assets, particularly Anchorpoint and Bedok Mall.
Occupancy at Anchorpoint jumped to 95% (4Q18) from 88% (3Q18) after a new F&B tenant commenced operations in December, while Bedok Point also delivered a marked improvement in occupancy levels from 79.2% to 84.2%.

Retail REITs have had a strong run in recent months, and supported by positive industry fundamentals, could have more legs to go. Likewise, the Manager anticipates the operating performance of its malls to remain stable.
Going into FY19F, we believe that rent reversionary trends should remain positive, mainly as Causeway Point – Frasers Centrepoint Trust’s crown jewel, will constitute the bulk (c.50%) of leases that are coming up for renewal. Negative rental reversion for Anchorpoint, which came in at -12.7%, was driven by more tactical factors, and should flatten out ahead.
The strong rent momentum seen in recent quarters (particularly 1Q19), if sustained, augurs well for future cashflows.

CEO Dr Chew also expressed intent to retire before the end of 2019 (FY19/20).
Instrumental to the REIT’s unbeaten track record – FY18 marked Frasers Centrepoint Trust’s twelfth consecutive year of DPU growth, we believe an acquisition may soon materialise for the REIT, which would drive further upside to our estimates.
Between the two assets in the Sponsor’s pipeline, we believe Waterway Point would be a more likely candidate for now compared to North Point South Wing, which has yet to complete its first rental cycle.
Outside of Singapore, Frasers Centrepoint Trust is also on the lookout for opportunities in the suburbs of Sydney or Melbourne.

Carmen TAY DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-01-22

SGX Stock Analyst Report BUY MAINTAIN BUY 2.40 UP 2.350