Frasers Centrepoint Trust - UOB Kay Hian 2020-07-27: Relative Stability In 3QFY20 Amidst Prolonged COVID-19 Pandemic

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FRASERS CENTREPOINT TRUST (SGX:J69U)

Frasers Centrepoint Trust - Relative Stability In 3QFY20 Amidst Prolonged COVID-19 Pandemic

• Frasers Centrepoint Trust's portfolio occupancy eased marginally by 1.5ppt q-o-q and 2.2ppt y-o-y to 94.6% despite the onslaught of COVID-19 pandemic. Shopper traffic rebounded after the commencement of Phase 2 of Safe Re-opening, and recovered to 61.1% of last year’s level in Jul 20.
• Recovery is slowly but surely taking root. Its focus on suburban retail malls and necessity spending, including F&B, enables Frasers Centrepoint Trust to weather a prolonged COVID-19 pandemic.
• Maintain BUY. Target price: S$2.90.

Frasers Centrepoint Trust's 3QFY20 business update:

• Frasers Centrepoint Trust (SGX:J69U) provided a business update for 3QFY20, which is in line with our expectations.

Maintained positive rental reversion.

• Management disclosed that rental reversion is flattish in 3QFY20 (less than 1%). The resiliency was attributed to the good location of Frasers Centrepoint Trust’s suburban malls that are well connected to MRT stations and have a strong catchment of residential population. Frasers Centrepoint Trust has only 4.8% of expiring leases by NLA to be renewed in 4QFY20.

Occupancy relatively stable despite onslaught of COVID-19 pandemic.

• Frasers Centrepoint Trust’s portfolio occupancy eased marginally by 1.5ppt q-o-q and 2.2ppt y-o-y to 94.6%. Occupancy declines were more significant at Bedok Point (-3.7ppt q-o-q) and Yew Tee Point (-2.6ppt q-o-q) as these smaller malls lacked strong anchor tenants. Waterway Point (-1.9ppt q-o-q), Causeway Point (-1.2ppt q-o-q), Changi City Point (-1ppt q-o-q) and Northpoint City (-0.8ppt q-o-q) also experienced slight easing in occupancies.
• Management acknowledged that the leasing market conditions have weakened. Tenants are monitoring the uncertainties arising from COVID-19 pandemic before committing to new leases.

Shopper traffic recovered to 60th percentile.

• Management noted that shopper traffic started declining since safe distancing measures were tightened and posted a steep drop at the onset of the Circuit Breaker period (7 Apr 20 to 1 Jun 20), before bottoming out in May (-68.3% y-o-y). Shopper traffic rebounded after the commencement of Phase 2 of Safe Re-opening and recovered to the 61.1% of last year’s level in Jul 20 (week starting 12 Jul 20).
• Management attributed the gap vs normalcy to safe distancing and traffic density measures imposed that have limited the capacity of retail malls.

Strong balance sheet with low gearing.

• Frasers Centrepoint Trust has secured S$200m of notes issued in May 20 and S$200m of committed revolving credit facilities, a total of S$400m in debt capital. Aggregate leverage remains low at 35% as of Jun 20.

More retailers open for business.

• More than 95% of its tenants have re-opened and resumed business since the start of Phase Two of Safe Re-opening on 19 Jun 20. Cinemas have re-opened on 13 Jul 20. Previously, only 30-40% of the tenants (mainly from essential trade sectors) were opened during the Circuit Breaker period and Phase One of Safe Re-opening.

Focused on necessity spending at suburban malls.

• The acquisitions of a 40% stake in Waterway Point and 36.9% stake in PGIM ARF have reinforced Frasers Centrepoint Trust’s strength in suburban retail malls. Frasers Centrepoint Trust was included in the FTSE EPRA/NAREIT Global Real Estate Index Series (Global Developed Index) since 23 Sep 19.

Measures to support tenants.

• Frasers Centrepoint Trust has already disbursed S$25m of landlord rental waivers (net of property tax rebates and cash grants). It has fulfilled its obligations under the COVID- 19 (Temporary Measures) (Amendments) Act to provide eligible tenants with two months of rental waivers.
• Frasers Centrepoint Trust will also fully pass on the property tax rebates and cash grants provided by the government to its tenants. Further assistance to tenants would be based on a targeted approach on a case-by-case basis.

Building scale and dominance in suburban retail malls.

• Frasers Centrepoint Trust has exercised its rights of pre-emption under the by-laws of PGIM Real Estate AsiaRetail Fund (ARF) to acquire 12.07% of ARF for S$197.2m. The acquisition was completed on 6 Jul 20 and increased Frasers Centrepoint Trust’s interest in ARF from 24.82% to 36.89%. The acquisition is fully funded by debt. Pro-forma gearing of Frasers Centrepoint Trust post acquisition was 36.2% as at 30 Sep 19 (previously 32.9%).

Returning cash previously retained back to unitholders.

• Management indicated intention to return cash of S$18m retained in 2QFY20 to unitholders in 4QFY20.

Valuations & Recommendation

• We have trimmed our Frasers Centrepoint Trust's FY20 DPU forecast by 2% due to additional rental waivers granted to eligible tenants. We increase our FY21 DPU forecast by 2.8% due to contribution from an additional 12.1% stake in PGIM ARF and lower cost of debt, which has improved from 2.63% in 4QFY19, 2.57% in 1QFY20 and 2.44% in 3Q20.
• Maintain BUY. Our target price of S$2.90 is based on DDM (cost of equity: 6.0%, terminal growth: 1.8%).
• 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.
• Share price catalysts:
  • Gradual but steady recovery in shopper traffic and tenant sales, accompanied by progressive easing of social distancing measures.
  • Acquisition of remaining 60% stake in Waterway Point and 63% stake in PGIM ARF from sponsor Frasers Property (SGX:TQ5).

Jonathan Koh CFA UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-07-27

SGX Stock Analyst Report BUY MAINTAIN BUY 2.90 UP 2.850