Frasers Centrepoint Trust - RHB Invest 2019-05-17: Acquires Stake In Waterway Point

FRASERS CENTREPOINT TRUST (SGX:J69U)

Frasers Centrepoint Trust - Acquires Stake In Waterway Point

Maintain NEUTRAL, new Target Price of SGD2.25 from SGD2.19, 8% downside.
FRASERS CENTREPOINT TRUST (SGX:J69U)’s much-awaited acquisition of Waterway Point is a positive move that will diversify earnings, strengthen its tenant base and provide growth opportunities.
Despite Frasers Centrepoint Trust’s stable earnings profile, valuations are unattractive, in our view. The stock is trading at 1.2x P/BV (near +2SD levels), with a yield of 5.2%.

Key risks remain fast-changing consumer trends, e-commerce growth and rising competition from new malls.

Frasers Centrepoint Trust announced the acquisition of a 33% stake in Waterway Point from its sponsor for SGD441m. The agreed price of SGD1.3bn (100% basis) is at par with the average of two independent valuations.
NPI yield (FY18 (Sep)) for the asset works out to 4.7%, which we believe is fair to unitholders and is comparatively on the high side (Frasers Centrepoint Trust’s recent acquisition of a stake in PGIM malls was at done at slightly below 4% yield, based on our calculations).
Waterway Point has an occupancy rate of 98.1%, and has 91 years of lease remaining. Management said it will be keen to purchase the remaining 66% stake, should the shareholders decide to sell. The transaction is subject to approval from unitholders.

Waterway Point is directly connected to the Punggol MRT and LRT stations, and is part of an integrated development – which gives it a catchment population. In addition, the mall’s trading area has one of the lowest retail mall floor space per capita at 2.77 sqf, vs Singapore’s overall average of 5.9 sqf (see Figure4 in attached PDF report). This has translated to healthy tenant sales growth (+10%) and shopper traffic (+3.9%) last year.
We expect this trend to continue, albeit at a slightly slower pace in the coming years – which gives it room for positive rental reversions ahead. We expect positive rent reversions of 3-5% in the near term.
Overall, we believe the mall is a good strategic fit for Frasers Centrepoint Trust’s suburban mall portfolio, and will help in income diversification (about 17% of enlarged portfolio).

Frasers Centrepoint Trust plans to issue 184m new units through a private placement and non-renounceable preferential offering, at issue prices of SGD2.27-2.30. This should raise maximum proceeds of SGD423m. Part of the proceeds will be used to pare down the recent bridge loan taken to fund the PGIM malls acquisition.
Gearing (post acquisition and placement) is expected to be at 33.2%, providing SGD300m in debt headroom for future acquisitions.
Overall, the transaction is marginally accretive to (pro-forma FY18) DPU and NAV.
We revise our FY19-21F DPU by 1-2% factoring in the recent acquisition and adjusting for debt costs. See Frasers Centrepoint Trust's dividend history.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-05-17

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