Frasers Centrepoint Trust - RHB Invest 2019-08-30: Moving Into Next Phase of Growth; NEUTRAL


Frasers Centrepoint Trust - Moving Into Next Phase of Growth; NEUTRAL

  • NEUTRAL, new SGD2.55 Target Price from SGD2.25, 7% downside with 4% FY19F (Sep) yield.
  • Frasers Centrepoint Trust’s share price has surged 26% YTD on: investors’ continued appetite for defensive yield plays, optimism over its latest acquisitions, and its potential inclusion in the FTSE NAREIT index.
  • While we remain positive on its latest moves and expect its well-located suburban malls to weather the challenging retail climate, it is not cheaply valued (1.3x P/BV, almost at +2SD). We recommend that investors wait for a pullback.

Recent acquisitions pave the way for next phase of growth.

  • The Waterway Point acquisition was completed in July (See our 17 May note titled Frasers Centrepoint Trust - Acquires Stake In Waterway Point). The asset offers good growth potential and diversification benefits due to its large catchment population and low retail floor space per capita in the region.
  • FRASERS CENTREPOINT TRUST (SGX:J69U)’s stake in PGIM Real Estate Asia Retail Fund (PGIM ARF) also increased to 21.1%, following a redemption event in the fund on 30 Jun. The REIT, together with its sponsor, now holds a majority (75% stake) in the fund and we see good synergies in terms of a wider tenant pool and rolling out a combined shopper loyalty rewards programme.
  • Gearing post recent acquisitions and placement still remains healthy at 32%, and we believe Frasers Centrepoint Trust will look at increasing its stake in the fund at the right opportunity.

Potential inclusion into FTSE EPRA NAREIT Index a short-term catalyst.

  • Post its recent share price rally and placement exercise, Frasers Centrepoint Trust’s enlarged market cap now stands at SGD3.1bn, with a free float of ~SGD2bn. This enables it to meet the FTSE EPRA NAREIT Developed Asia Index criteria (review due in Sep 2019), ie 75% of assets in the developed market and free float of more than ~SGD1.7bn.
  • The potential inclusion will likely support Frasers Centrepoint Trust’s share price in the near term and will help to further boost trading liquidity and improve its investor base.

Robust operational performance but challenges ahead with retail sales slowing down.

  • Frasers Centrepoint Trust’s suburban malls continued to chalk out a healthy operational performance (3QFY19) with occupancy rate improvements (overall at 96.8%) and continued positive rental reversions – underlining its defensiveness, despite the market challenges.
  • Shopper traffic and tenant sales also registered positive growth in the recent quarter despite the dip in overall market retail sales, which is positive. However, signs of weakness in retail demand are starting to emerge, with recent news flow on downsizing/exits by key retail tenants (Isetan, Metro and DFS, etc). The weaker demand outlook is, however, partly mitigated by limited new retail supply over the next three years.

Target Price adjustment.

  • We cut CoE by 50bps to 6.9% and raise our terminal growth assumption to 2% from 1.75%, to better reflect the current prolonged low interest rate environment.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-08-30
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 2.55 UP 2.250