Frasers Centrepoint Trust - RHB Invest 2019-04-25: Stable Performer, Yet Valuations Not Cheap


Frasers Centrepoint Trust - Stable Performer, Yet Valuations Not Cheap

  • Maintain NEUTRAL and Target Price of SGD2.19, 7% downside. Our Target Price is at low end of consensus.
  • 2QFY19 DPU met expectations. Frasers Centrepoint Trust’s suburban malls continue to deliver stable performance despite challenges in the retail sector. Valuations however are not cheap in our view with the stock trading at 1.1x P/BV, offering FY19F yield of 5.3%.
  • Key catalysts would be accretive acquisition of sponsor assets and better-than-expected pickup in retail demand.
  • Key risks are competition from newer malls, rapid e-commerce growth, and fast changing consumer preferences.

FCT's 2QFY19 (Sep) DPU up 1.2% y-o-y, results in line.

  • FRASERS CENTREPOINT TRUST (SGX:J69U)'s revenue and NPI rose 2% and 5% y-o-y, driven by occupancy improvements, higher turnover rents, lower property tax, and utility expenses.
  • Frasers Centrepoint Trust also released SGD0.35m of retained income from the prior year during the quarter.
  • The slightly lower DPU growth of 1.2% was mainly due to a higher percentage of management fees paid in cash (20% in units compared to 40% last year). Results were in line with 2Q/1HFY19 DPU accounting for 25% and 49% of our full year forecast.

Accretive acquisition of PGIM RE ARF to reap portfolio synergies.

  • Frasers Centrepoint Trust in February and March announced the acquisition of 19% stake in PGIM Real Estate Asia Retail Fund (PGIM RE ARF) for a total purchase price of SGD376m. The portfolio comprises of six malls in Singapore (Tiong Bahru Plaza, White Sands, Liang Court, Hougang Mall, Century Square and Tampines1), an office property (Central Plaza) in Singapore, and four retail malls in Malaysia.
  • Based on our calculations, we estimate NPI yields to be slightly < 4%. Assuming the acquisition is fully funded by debt, it should increase gearing to c.36% from 28.8%, and result in a pro-forma (FY18) DPU accretion of 3.6%.
  • The REIT manager noted that besides yield accretion, there are broader synergies that can be reaped, which include gaining a larger retail footprint, co-branding opportunities, as well as lower advertising and marketing costs.

No negative impact from opening of Jewel.

  • Management noted that recent opening of Jewel Changi (Jewel) has not had any negative impact on shopper traffic in Changi City Point (CCP) so far, and the mall is still seeing strong patronage from improved connectivity (opening of downtown line), opening of outlet concept stores and revamped tenant mix.

Slight dip in portfolio occupancy due to transitional vacancy.

  • Portfolio occupancy dipped 0.4ppt q-o-q to 96% mainly due to lower occupancy at Causeway Point (97.4%, -1.3ppts q-o-q) and Northpoint City North Wing (96.5%, -1.4ppts q-o-q), partially offset by higher occupancies at Changi City Point and Bedok Point.
  • Frasers Centrepoint Trust mentioned that the drop in occupancy was mainly due to exit of some of the IT and electronics retailers but added that replacement tenants have been identified. However, Changi City Point is expected to see a slight occupancy dip in the near term due to the commencement of construction of the Underground Pedestrian Link (UPL) connecting Basement 1 of Causeway Point and Woods Square.

Rental reversion positive, but growth to moderate.

  • Frasers Centrepoint Trust’s malls recorded positive rent reversion of 2% during the quarter, with all malls registering higher rents for lease renewals except Changi City Point. A slight concern however, has been the notable trend of declining portfolio tenant sales (-1.3% y-o-y in 2QFY19) despite the increase in mall shopper traffic.
  • Overall, we expect rental reversion for FY19 to moderate in the 1-3% range, compared to mid-single digit levels in the previous years.

Still room for inorganic growth.

  • Management is still keen on acquiring its sponsor’s assets – Waterway Point (1/3 stake) and Northpoint City South Wing in Singapore – at the right opportunity. We believe the assets would be a good addition to Frasers Centrepoint Trust’s portfolio considering its strong position and synergies to its existing portfolio.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-04-25
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 2.190 SAME 2.190