Frasers Centrepoint Trust - UOB Kay Hian 2020-09-07: Transformative Acquisition To Expand From 7 To 11 Suburban Retail Malls


Frasers Centrepoint Trust - Transformative Acquisition To Expand From 7 To 11 Suburban Retail Malls

  • The acquisition of 63.1% stake in ARF is transformative, increasing Frasers Centrepoint Trust’s number of suburban retail malls from seven to 11 and catchment population by 40% to 3m. We estimated that distributable income could double to S$228m in FY21.
  • Frasers Centrepoint Trust could also benefit from higher index weightage in the FTSE EPRA/NAREIT Global Developed Index.
  • Maintain BUY with higher target price of S$3.10.

Buying the remaining 63.1% of ARF.

  • Frasers Centrepoint Trust (SGX:J69U) has announced the proposed acquisition of the remaining 63.1% stake in AsiaRetail Fund (ARF) for S$1,057.4m from sponsor Frasers Property (SGX:TQ5). Frasers Centrepoint Trust currently owns 36.9% of ARF. ARF’s Singapore portfolio includes five suburban retail malls, which are Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1, as well as one office property Central Plaza.
  • NPI yields for the suburban retail malls were 4.9-5.1% and office building at 3.5% in FY19.

Proposed divestment.

Complementary footprint for suburban retail malls.

  • The proposed acquisition will allow Frasers Centrepoint Trust to expand its presence in Northeastern and East regions, increasing its catchment population by 40% to 3m, which represents 52% of Singapore’s population. Frasers Centrepoint Trust is well positioned to benefit from the government’s plan to decentralise and grow regional and sub-regional centres.

Enlargement of scale.

  • Upon completion of the transactions, Frasers Centrepoint Trust’s retail portfolio will increase from seven to 11 suburban retail malls, while total NLA will expand by 64% to 2.3m sf. Frasers Centrepoint Trust’s portfolio size will increase 85% to S$6,650m. It would double Frasers Centrepoint Trust’s market share for suburban retail floor space to 10.2%, which is the second largest and a whisker away from CMT’s 10.6%.

Higher weightage in key equity indices.

Caters to essential services.

  • The combined retail portfolio derives 53.6% of its total gross rental income from the essential services, which underpin Frasers Centrepoint Trust’s resilience.

Reduction of concentration risk.

  • The single largest asset Causeway Point would represent no more than 22% of the aggregate value of the enlarged retail portfolio, compared with around 30% currently.

Funded through new equity.

  • Frasers Centrepoint Trust has proposed an equity fund raising exercise to raise S$1.3b, comprising a private placement to institutional investors and/or a non-renounceable preferential offering of new units to the existing unitholders on a pro rata basis. Sponsor Frasers Property is committed to support the equity fund raising. It will take up its pro rata share in the private placement and undertakes to apply for excess preferential offering units, ensuring that the preferential offering will be fully taken up.

Frasers Centrepoint Trust will hold an EGM

  • Frasers Centrepoint Trust will hold an EGM to approve the proposed acquisition of 63.1% stake in ARF, divestment of Bedok Point, equity fund raising exercise and whitewash resolution that will be held at 10am on 28 Sep 20 by way of electronic means.

Stock Impact

Transaction is DPU accretive.

  • Management estimates that the acquisition of 63.1% stake in ARF and divestment of Bedok Point is accretive to DPU by 8.6% and 4.7% respectively on a pro forma basis for FY19 and 9MFY20.

Efficient holding structure eradicates tax leakage.

  • The existing effective tax rate for ARF is 13-14%. Upon completion of the proposed acquisition and restructuring to convert asset holding companies into LLP, Frasers Centrepoint Trust will have full control over the properties and unitholders can enjoy tax transparency.

Opportunity for asset re-cycling.

  • Central Plaza (adjacent to Tiong Bahru Plaza), an office building with NLA of 144,250sf, will become a non-core asset post-acquisition. Management will review its options to divest Central Plaza. The office building is currently valued at S$215m.

Suburban retail malls are more resilient.

  • For both Frasers Centrepoint Trust and ARF, shopper traffic as at end-Jul 20 has recovered to 60-70% of last year’s level. Similarly, tenants’ sales have recovered to 97-99% of last year’s level. The pace of the recovery demonstrates the resilience of suburban retail malls.

Maintain BUY on Frasers Centrepoint Trust

  • We raise our FY21 DPU forecast higher by 12% to 13.26 S cents due to full-year contribution from the additional 63.1% stake in ARF and savings from tax leakage. We have assumed that:
    1. the acquisition is completed on 30 Sep 20,
    2. the transaction is funded by issuance of 585.6m new units at S$2.40 each, and
    3. NPI margin of 70% for the five suburban retail malls and 80% for the sole office building Central Plaza.
  • Maintain BUY. Our target price of S$3.10 is based on DDM (required rate of return: 6.5%, terminal growth: 1.2%).

Frasers Centrepoint Trust share price catalyst

Jonathan Koh CFA UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-09-07
SGX Stock Analyst Report BUY MAINTAIN BUY 3.10 UP 2.900