Frasers Centrepoint Trust - UOB Kay Hian 2021-01-25: 1QFY21 Defensive Yield From Necessity Consumption


Frasers Centrepoint Trust - 1QFY21 Defensive Yield From Necessity Consumption

  • Frasers Centrepoint Trust’s business update for 1QFY21 demonstrated resiliency of its suburban malls. Portfolio occupancy edged higher by 1.5ppt q-o-q to 96.4% and rental reversions were flattish. Tenant sales have recovered to near pre-COVID-19 levels.
  • Frasers Centrepoint Trust has divested Bedok Point and Anchorpoint in reconstitution to focus on larger suburban malls. The potential acquisition of Northpoint City South Wing could be the next catalyst.
  • BUY Frasers Centrepoint Trust for defensive distribution yield of 5.3% for FY21F. Target price: S$3.18.

Suburban malls are more resilient.

  • Frasers Centrepoint Trust (SGX:J69U)’s suburban malls are well located with connectivity to MRT stations and bus interchanges, close proximity to dense population catchments and cater to essential services and non-discretionary spending.
  • Portfolio occupancy edged higher by 1.5ppt q-o-q to 96.4% in 1QFY21. We saw improvement in occupancies at Century Square (+2.6ppt), Northpoint City North Wing (+3.7ppt), Tampines 1 (+2.3ppt) and Waterway Point (+2.1ppt).
  • Tenant sales have recovered to near pre-COVID-19 levels, accompanied by the usual seasonal pick-up during the year-end festive period.

Polarisation in performance of different trade sectors.

  • Frasers Centrepoint Trust has renewed about one quarter of leases expiring in the current financial year during 1QFY21. Rental reversions were flattish.
  • Trade sectors that performed well and provided positive rental reversions included essential services, such as supermarkets & grocers and beauty & healthcare. Jewellery & watches benefitted from Singaporeans shopping locally. Homeware & furnishing and electrical & electronics benefitted from employees working and spending more time at home. On the contrary, fashion & accessories and food & beverage continued to face challenges and suffered negative rental reversion.
  • For tenants facing difficulties, Frasers Centrepoint Trust could renew their leases on a short-term basis and re-negotiate leases with longer duration at a later date. Frasers Centrepoint Trust has provided rental waiver of only S$0.2m in 1QFY21 for tenants in the leisure & entertainment segment, where activities remain restricted.

Engaging tenants early on lease renewal.

  • Leases representing 28.3% of total NLA and 29.6% of gross rental income will expire during 2Q to 4Q of FY21. Century Square, Hougang Mall and Tampines 1 accounted for 51% of the leases expiring. Management is confident of renewing leases with anchor tenants providing essential services that have generally performed well. Many tenants are already in advanced negotiations, although some tenants with uncertain outlook may wait till the last minute.

Gearing well within regulatory limit.

  • Frasers Centrepoint Trust's aggregate leverage has increased from 35.9% to 37.7% after completing the acquisition of a 63.1% stake in AsiaRetail Fund (ARF) on 27 Oct 20. We estimate that aggregate leverage could decline to 36.6% if the proceeds from the divestment of Anchorpoint is fully utilised to repay borrowings. Average cost of borrowings has improved by 0.2ppt q-o-q to 2.2%.

Phase 3 of re-opening commenced on 28 Dec 20.

  • The size of social gatherings, including dining-in at restaurants, increased from five to eight persons. The capacity limit for retail malls and large standalone stores increased from 10sqm per person to 8sqm per person. The easing of safe distancing measures with Phase 3 re-opening would support further recovery of shopper traffic and tenant sales.

Focusing on larger and more dominant suburban malls.

  • Frasers Centrepoint Trust has entered into a sale and purchase agreement for the proposed divestment of Anchorpoint Shopping Centre for a total consideration of S$110m. The independent appraised value of the suburban mall was also S$110m as at 15 Sep 20. The expected net proceeds from the divestment of S$108.8m will be used to repay borrowings. The divestment is expected to be completed by 22 Mar 21.
  • Frasers Centrepoint Trust continues to maintain a disciplined approach in portfolio reconstitution. Other properties to be potentially divested include YewTee Point (73,669sf) and Central Plaza (144,250sf). Frasers Centrepoint Trust is not actively soliciting offers. It will consider divesting YewTee Point and Central Plaza if it receives attractive and irresistible offers.

Supporting omni-channel retail strategies.

  • The expanded scale post acquisition of ARF 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 fulfilment hubs for “last-mile” delivery and Click & Collect services in their immediate residential catchment.
  • More retailers and F&B operators are moving to omni-channel retail as working from home becomes more prevalent. The more efficient use of retail space would create sticky relationships with tenants.

Frasers Centrepoint Trust - Valuation & Recommendation

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-01-25
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