Frasers Centrepoint Trust 2HFY20 - UOB Kay Hian 2020-11-04: Suburban Malls Proven To Be More Resilient

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FRASERS CENTREPOINT TRUST (SGX:J69U)

Frasers Centrepoint Trust 2HFY20 - Suburban Malls Proven To Be More Resilient

• 2HFY20 results demonstrate resiliency of Frasers Centrepoint Trust’s suburban malls. Portfolio occupancy inched up 0.3ppt q-o-q to 94.9%. We estimated positive rental reversion at 3.2% in 2HFY20 (1HFY20: 5.2%). Tenants’ sales have recovered to near pre-COVID-19 levels in 4QFY20.
• The acquisition of 63.1% of ARF was completed on 27 Oct 20. ARF’s properties are expected to account for 56% of Frasers Centrepoint Trust’s gross revenue in FY21.
• BUY Frasers Centrepoint Trust for attractive FY21F distribution yield of 6.5%. Target price: S$3.15.

Frasers Centrepoint Trust's 2HFY20 Results

• Frasers Centrepoint Trust (SGX:J69U) reported 2HFY20 DPU of 4.372 cents (-26.1% y-o-y), in line with our expectations. Excluding rental relief of S$27.4m, FY20 gross revenue and NPI would have declined only 2.4% and 0.7% y-o-y respectively.
• Frasers Centrepoint Trust has released distribution of S$18.0m in 2HFY20, which was retained during 1HFY20.

Maintained positive rental reversion.

• Frasers Centrepoint Trust achieved positive rental reversion of 4.2% for FY20. We estimated positive rental reversion at 3.2% in 2HFY20 (1HFY20: 5.2%). The resiliency was attributed to the good locations of Frasers Centrepoint Trust’s suburban malls that are well connected to MRT stations and have strong catchment of residential population.
• A substantial portion of the renewals was completed in 1HFY20, prior to the circuit breaker (7 Apr 20 to 1 Jun 20).

Occupancy held steady despite COVID-19 pandemic.

• Frasers Centrepoint Trust’s portfolio occupancy inched up 0.3ppt q-o-q to 94.9%. Occupancies at Causeway Point and Changi City Point were stable at 96.6% and 90.4% respectively. Occupancies at Waterway Point and YewTee Point improved 1.6ppt and 1.1ppt to 96% and 97.1% respectively.
• Larger malls have fare better as retailers consolidate their networks at larger malls, while smaller malls lack strong anchor tenants.

Stable capital values.

• Valuation for Frasers Centrepoint Trust’s investment properties gained marginally by 0.4% to S$2,857m. Valuation for its 40% stake in Waterway Point was unchanged at S$520m.

On path to progressive and gradual recovery.

• All retailers, with a few exceptions such as family karaoke and travel agencies, have resumed operations. Shopper traffic has remained relatively stable at 60-70% of pre-COVID-19 levels in 4QFY20 (July-September). Portfolio tenants’ sales have recovered to near pre-COVID-19 levels since the reopening of the economy in Jun 20.

Phase 3 of reopening by end-20.

• The multi-ministry task force on COVID-19 expects Singapore to enter Phase 3 of reopening by this year-end, assuming community cases remain low. The gathering size, including dining-in at restaurants, will increase from five to eight persons. Easing of safe distancing measures with Phase 3 reopening would likely support further recovery in shopper traffic and tenant sales.

Expect mild negative reversions in FY21.

• Frasers Centrepoint Trust's management expects the leasing market to remain soft as tenants adopt a wait-and-see approach. We have factored in negative rental reversion of 5% in our forecast for FY21, in line with our expectations for suburban malls.

Transformative acquisition adds scale in suburban malls.

• The acquisition of the remaining 63.1% stake in AsiaRetail Fund (ARF) for S$1,057m adds five suburban malls - Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1 - bringing Frasers Centrepoint Trust’s total number of suburban malls to 11. Total NLA will expand 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%.
• The acquisition of 63.1% of ARF was completed on 27 Oct 20. Frasers Centrepoint Trust has converted ARF’s asset holding companies into LLP, thereby allowing unitholders to enjoy tax transparency and eradicate tax leakage. We estimate ARF’s properties will account for 56% of Frasers Centrepoint Trust’s gross revenue in FY21.

Focusing on capturing revenue and cost synergies.

• The expanded scale enables Frasers Centrepoint Trust to offer more value and options for retailers. Frasers Centrepoint Trust plans to harness the enlarged scale to drive omni-channel retail strategies, positioning its suburban malls as “last-mile” fulfilment hubs in their immediate residential catchment. The larger scale also enables Frasers Centrepoint Trust to reduce operating expenses through bulk purchase.

Maintain BUY

• We keep our FY21 distribution forecast for Frasers Centrepoint Trust relatively unchanged at 13.4 cents. Maintain BUY.
• Our target price of S$3.15 is based on DDM (required rate of return: 6.0%, terminal growth: 1.8%).
• Pure play on normalisation recovery in domestic consumption in Singapore. Frasers Centrepoint Trust's share price has corrected by 24% from its peak of S$2.72 in early-September. Frasers Centrepoint Trust provides an attractive FY21F distribution yield of 6.5%.
• 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.
• Frasers Centrepoint Trust's share price catalyst:
  • 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 from sponsor Frasers Property.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-04

SGX Stock Analyst Report BUY MAINTAIN BUY 3.15 UP 3.100