Frasers Centrepoint Trust - DBS Research 2020-03-09: A Perfect Match; Unscathed From COVID-19 Outbreak

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FRASERS CENTREPOINT TRUST (SGX:J69U)

Frasers Centrepoint Trust - A Perfect Match; Unscathed From COVID-19 Outbreak

• Unwinding of PGIM ARF fund to take hold in 2020; projected DPU accretion of up to 7.1% eventually if Frasers Centrepoint Trust gains 100% control.
• Apart from potentially doubling of AUM; Frasers Centrepoint Trust will be the eighth-largest S-REIT.
• COVID-19 disruption is manageable; portfolio should deliver resilient numbers.
• Raise our Target Price to S$3.35, assuming PGIM in our valuation.

Maintain BUY with Target Price raised to S$3.35, as we price in the valuation of PGIM.

• We believe the time is ripe for Frasers Centrepoint Trust (SGX:J69U) to make bold, decisive moves to take the leap to join the big caps in the S-REIT space come 2020. We anticipate the unwinding of PGIM ARF to accelerate this year given the significant control that the group holds in the management of the fund.
• With an exciting doubling of its AUM and revenues from this exercise and an accretion ranging from 2.9-7.1%, we expect Frasers Centrepoint Trust to join the larger-cap S-REITs in terms of valuation multiples (ranging from 1.5-2.0x P/NAV) given stronger liquidity and growth prospects.
• In addition, we believe that Frasers Centrepoint Trust will continue to trade north of 1.4x p/bk as its status will be alleviated as the only pure-play Singapore-focused retail S-REIT.
• BUY!

Coronavirus outbreak an ongoing headwind to retail but suburban malls should be resilient.

• The Singapore government tightened alert on the COVID-19 outbreak, raising the dorscon (disease outbreak level) from Yellow to Orange on 7 February after seeing signs of community spreading. With business continuity plans implemented across firms, and logical precautions taken by Singaporeans to minimise social contact and gathering over the past few weeks, we have seen shopper traffic thinning island-wide, at a greater degree in malls within the Central regions of Singapore.
• This is alongside stricter travel restrictions imposed on China travellers and countries with accelerating number of confirmed COVID-19 cases. The Singapore Tourism Board expects a 25- 30% dip in tourist arrivals this year, a number that could be alleviated given a potential knock-on effect.
• China represents one of Singapore’s key visitor source markets, historically contributing c.20% of total visitors annually and the largest spenders, contributing the lion’s share (c.20%) of the S$10.2bn tourism receipts (1H19). The bulk of this (51%) went into shopping, followed by accommodation (17%), F&B (12%) and others (36%), which could potentially shave a significant percentage of tourist shopping expenditure this year.

Dominance maintained at FCT’s suburban malls.

• Frasers Centrepoint Trust’s portfolio of suburban malls maintains a position of dominance due to its proximity to residential catchment areas, in contrast to prime central malls. Malls within the Central regions of Singapore that place high reliance on tourist flows saw a sharp decline in traffic, in the range of 50-60% given our estimates, for the month of February. Suburban malls saw a similar dip in traffic but limited to a 10-20% drop. Since the drop, we understand that traffic has been returning to the malls, which bodes well for forward performance.
• Furthermore, a high percentage of Frasers Centrepoint Trust’s tenants target necessity shopping in segments such as food & beverage (c.32% by NLA) and supermarket (c.7% by NLA), which we think should not be as impacted as much as tenants within the discretionary expenditure space.
• The turn of COVID-19 events may result in temporary changes to shopper spending behaviour, but we think that the peak had been reached in mid-February, second week into the Orange dorscon alert, and fears regarding the COVID-19 virus are showing signs of tapering as health data suggests that the outbreak situation is under control. As such, shopper traffic would likely recover to norm when the doscon level is reverted to Yellow, which we envision to happen by late March.

Uptick in e-commerce sales -“Netflix and order-in”?

• As of December 2019, 6.8% of total sales were generated online. We envision a sharp uptick in online sales going into 1Q20, with a sharp turn in consumer behaviour and spending. More would opt to stay in and shop online to minimise out-of-home exposure for safety reasons. Suburban malls that are located closer to end-user homes, within residential catchment areas, would likely benefit from a greater number of online orders.
• Footprint of online sales generated through food delivery services and e-commerce may be traced back to brick-and-mortar stores but is not traditionally captured within the POS system of retail malls. As such, dip in tenant sales figures for Frasers Centrepoint Trust in the coming quarters may be an over-statement.

Tenant support package across 14 malls.

• Frasers Centrepoint Trust announced tenant support packages across Frasers Property Group’s combined retail portfolio of 14 malls, including malls held under PGIM ARF. The two-pronged tenant support package aims to target immediate cash flow challenges experienced by tenants stemming from a sudden drop in revenue and pro-shopper initiatives to drive up shopper traffic.
• Additional rental relief will be provided to tenants that are most affected. Frasers Centrepoint Trust will also be passing on the 15% property tax rebate announced in the Budget 2020 to qualifying businesses. Selected tenants can also convert security deposits paid in cash to banker’s guarantees to ease cash flow challenges. Tenants can also opt for shorter operating hours from 11am to 9pm. Pro-shopper initiatives include complimentary parking between 12-2pm and 6-10pm daily and enhanced marketing efforts.

A marriage made in heaven

Potential doubling of AUM with remaining stake in PGIM ARF.

• Looking beyond short-term headwinds to the retail sector, we do not think current events will deviate Frasers Centrepoint Trust from its long-term growth trajectory, which entails a takeover of the remaining stake in PGIM ARF, which we see the group unveiling this strategy in the near term.
• Frasers Centrepoint Trust currently holds a 24.8% stake in PGIM ARF, the largest privately held suburban retail mall owner in Singapore. With another 64.9% held by the sponsor and the recent acquisition of the asset manager of PGIM ARF by the sponsor, we see the chance of an integration sooner rather than later. With only a remaining c.10% held by third parties, we believe that Frasers Centrepoint Trust, given its strong share price, may look to act earlier than later.
• Assuming that Frasers Centrepoint Trust acquires the remaining stake in PGIM ARF, we estimate that Frasers Centrepoint Trust could double the number of retail malls within its portfolio and its total assets under management could close to double from c.S$3.6bn to c.S$6.6bn.

Upgrading to “Fortress-like” assets with PGIM ARF

• Frasers Centrepoint Trust’s strategy remains to be in retail assets that are well located with great connectivity to transportation nodes and large residential catchments, and PGIM ARF malls meet those attributes, in our view.
• One of the defining characteristics of ‘fortress malls’ would be the size of the retail malls (>150k sqft) which are located within key transportation nodes and/or servicing a primary population catchment living nearby.
• We see an array of complimentary attributes between

PGIM and FCT’s portfolio.

• Frasers Centrepoint Trust and PGIM’s geographical footprints are focused within the North/Northeast and Northeast/East regions of Singapore, situated at strong residential catchment areas such as Yishun and Tampines.
• These same regions also represent areas that have lower mall floor space per capita within the range of 2-5 sqft/capita, below the island-wide average of 6 sqft/capita.
• Core assets within both portfolios are all sizeable in nature ( > 100k sqft) with a similar mix in tenants (food & beverage, necessity spending).
• The similar tenant mix could lay the path for synergies in the future such as Frasers Centrepoint Trust’s shopper loyalty programme (Frasers Experience) and tenant expansion.
• PGIM and Frasers Centrepoint Trust’s malls have similar lease expiries in 2091 and 2093 respectively.

An opportunity to unlock value from its existing portfolio or an asset swap with sponsor?

• As such, with a focus on larger-scale malls which offer operational efficiency, we believe that Frasers Centrepoint Trust will likely undertake a portfolio review and potentially look to divest some of the smaller-sized malls within the portfolio. These may come in the form of a divestment to third parties or potential asset swap with its sponsor (with its stake in PGIM ARF) to sharpen Frasers Centrepoint Trust’s focus in the longer term.
• Some of the assets that may be divested include Anchorpoint, Bedok Point and Yewtee Point which are sized between 71k and 83k sqft and significantly smaller compared to Frasers Centrepoint Trust’s anchor assets which average at c.300k sqft. The latter two malls may be more likely given their small scale while Anchorpoint’s freehold land lease tenure may be hard to replace if sold.
• That said, these three malls contributed c.15% to total rental revenue in FY19 and had been undergoing periods of stabilisation due to various external factors such as low shopper traffic or competing retail supply. As such, we think that Frasers Centrepoint Trust may be keen to divest these assets as they drift away from their ‘dominant’ attributes.
• The divestment of Anchorpoint, Bedok Point and Yewtee Point could bring proceeds of c.S$370m based on the latest valuation review (30 Sep 2019).
• Frasers Centrepoint Trust’s 31.15% stake in Hektar would be valued at c.S$104m based on the portfolio’s latest valuation of c.S$407m (RM1.2bn).
• See Frasers Centrepoint Trust Share Price; Frasers Centrepoint Trust Target Price; Frasers Centrepoint Trust Analyst Reports; Frasers Centrepoint Trust Dividend History; Frasers Centrepoint Trust Announcements; Frasers Centrepoint Trust Latest News. 

Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-03-09

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