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

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.

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

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.

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.

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.

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 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.

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.

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.

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%).

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

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