Frasers Centrepoint Trust - RHB Invest 2019-10-24: A Transformational Year


Frasers Centrepoint Trust - A Transformational Year

  • Maintain NEUTRAL and Target Price of SGD 2.55, 7% downside plus 4.6% yield.
  • FRASERS CENTREPOINT TRUST (SGX:J69U)’s FY19 (Sep) DPU was slightly below, accounting for 98% of forecasts, mainly due to higher borrowing costs and slightly lower subsidiary contributions.
  • Operationally, Frasers Centrepoint Trust remains strong with healthy occupancy improvements, coupled with continued positive rental reversions. See Frasers Centrepoint Trust Announcements.
  • While Frasers Centrepoint Trust’s niche positioning as a sub-urban retail landlord offers a defensive attribute, we believe most of the positives are priced in post a strong YTD rally of +25%.

Healthy operating metrics continue while rent growth expected to slow down.

  • Portfolio occupancy improved 1.8ppt y-o-y to 96.5% with a healthy occupancy improvement seen across all its malls. Overall, we believe Frasers Centrepoint Trust’s suburban malls have weathered well the challenges posed from high retail supply and a sluggish retail environment on the back of its strong positioning and active management efforts.
  • After registering a strong rental reversion of 4.8% in FY19, we expect rental reversions to be 2-3% in FY20F on the back of a slowdown in retail sales and a high percentage (c.36% of portfolio) of lease expires in malls.

A milestone year in terms of acquisitions but with upside priced in.

  • During FY19, Frasers Centrepoint Trust successfully completed the much awaited acquisition of Waterway point (40% stake) and acquired a 24.8% stake in PGIM ARF (which holds five suburban malls) investing c.SGD910m. The acquisition, along with associated fund raising, resulted in the stock being included in the FTSE EPRA/NAREIT index which resulted in an increased liquidity and investor base. (See SGX Market Update: Recent SGX Additions to FTSE EPRA Nareit Global Developed Index)
  • Gearing post recent acquisitions remains comfortable at 32.9% and presents a healthy debt headroom of > SGD 500m for acquisitions. In the near-term, we believe Frasers Centrepoint Trust’s focus will be on extracting value from recent acquisitions and reaping synergies.
  • Potential acquisition targets in the medium-term include Northpoint City North wing and the remaining stake in the PGIM portfolio. With a sizeable growth in its portfolio assets management it also guided that it is open to divest some of its smaller malls at a right price.

Key upside/downside risks.

  • Positive share price catalysts are continued yield compression across REITs sector, stronger than expected rental growth in its key malls and accretive acquisitions/divestments.
  • Key downside risks are a sharp slowdown in retail sales and a continued exit of major brands/operators out of the Singapore market.

DPU and Target Price adjustment.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-10-24
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 2.550 SAME 2.550