Frasers Centrepoint Trust - RHB Invest 2020-04-27: A Resilience Test


Frasers Centrepoint Trust - A Resilience Test

  • Keep NEUTRAL with a new SGD2.07 Target Price from SGD2.55, 5% upside plus 5% yield.
  • The uncertainty from COVID-19 is expected to have a profound impact on the retail sector. However, we expect Frasers Centrepoint Trust (SGX:J69U)’s suburban malls, which mainly cater for domestic necessity spending, to fare relatively better. While occupancies and rent have so far been holding up well, we expect strong near-term headwinds if the pandemic prolongs.
  • Among retail REITs, Frasers Centrepoint Trust remains our preferred pick.

Retention of 50% of 2Q distributable income

  • Retention of 50% of 2Q distributable income – to buffer the brunt of COVID-19’s impact – to be felt in 3QFY20 (Sep). While 2Q distributable income rose 25% y-o-y, DPU declined 48.7% on the 50% retention of distributable income and enlarged unit base. This retention is to buffer the rental impact from the extended circuit breaker – 7 Apr to 1 Jun – which has resulted in closures of all malls except for essential shops (eg supermarkets, pharmacies, etc) and food & beverage outlets (takeaways only).
  • Additionally, the passing of a new bill allowing tenant rental deferments of up to six months has resulted in some cash flow uncertainties. So far, only one of Frasers Centrepoint Trust’s tenant has requested for a deferral. In terms of rent rebates, it is currently offering c.2 months of rental waivers – including property tax rebates of c.1 month – and tenants can also utilise their cash security deposits to offset one month of rent.
  • In light of the extended circuit breaker announced recently, management is reviewing this package for further assistance to its tenants.

Slight dip in occupancy, but rent reversions remain healthy.

  • Overall mall occupancy dipped 1.2ppts q-o-q to 96.1%, mainly due to Northpoint City North Wing and Changi City Point (CCP). CCP saw non-renewal of two leases and pre-termination of one tenant. Leasing activities are expected to remain fairly slow, and we envisage the possibility of more short-term leases due to the circuit breaker.
  • Rent reversion was a healthy 5.2%, as most of the leases were signed before COVID-19’s worsening.
  • Looking ahead, we expect rent reversions to be flattish at best. 2Q shopper traffic and Dec 2019-Feb 2020 tenant sales saw 2.4% and 4% declines.

No balance sheet concerns, but interest costs are likely to see an increase.

  • Gearing is low at 33.3%, well below the raised 50% threshold limit, with an interest cover of 6.4x (minimum requirement: 1.5x). However, with Moody’s and Standard & Poor’s recently downgrading Frasers Centrepoint Trust’s credit rating a notch, we believe borrowings will likely see a 20-50bps rise (now: 2.44%). About 17% and 23% of FY20-21’s debts are due for refinancing.

Earnings and DDM changes.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-04-27
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 2.07 DOWN 2.550