Frasers Centrepoint Trust - Phillip Securities 2021-04-27: Finding Footing In Shifting Sand


Frasers Centrepoint Trust - Finding Footing In Shifting Sand

  • Frasers Centrepoint Trust (SGX:J69U)'s 1H21 DPU of 5.996 cents, up 28.4%, was in line, at 45.0% of our estimate. Earnings were lifted by 5 months of contribution from ARF portfolio, acquired on 28 October 2020.
  • January/February tenant sales grew y-o-y, outpacing the Retail Sales Index (RSI). Retail portfolio occupancy of 96.1% near pre-pandemic levels. Retail rental reversions of -0.7% due to change in reversion methodology; otherwise +2.9%.
  • Maintain BUY on Frasers Centrepoint Trust with DDM target price (COE 6.38%) lowered from S$2.93 to S$2.88.

The Positives

Tenant sales growth in January and February outpaced RSI.

  • Frasers Centrepoint Trust's tenant sales grew 0.4%/11.7% y-o-y in January/February, outpacing the RSI’s -8.1%/7.7%. This was in spite of an absence of atrium sales which are still prohibited due to safe distancing. That said, the recovery among the trade sectors remained uneven.

Divestment of Yew Tee Point at 15.8% above book.

  • Frasers Centrepoint Trust announced the divestment of Yew Tee Point on 19 March 2021 for S$220mn. Consideration was 10% above the latest valuation of S$200mn on 31 January 2021 and 15.8% above book value of S$190mn. This was its third divestment in six months, as part of its pivot to larger malls with bigger catchments. The divestment is expected to be completed on 28 May 2021, with proceeds used to pare down debt and lower gearing.

The Negatives

Retail occupancy dipped 0.3ppt from 96.4% to 96.1% (2Q20: 96.1%).

  • Occupancy at Causeway Point gained 1.5ppts to 99.63%. That at Changi City Point improved 4.0ppts to 94.7%, Hougang Mall by 3.7ppts to 99.3% and Century Square by 2.3ppts to 96.4%. The gains were, however, erased by lower occupancy at Waterway Point, down 5.9ppts to 92.2%, and Tampines 1, down 2.3ppts to 91.9%.
  • Occupancy at Waterway slipped after the pre-termination of H&M. Frasers Centrepoint Trust will be subdividing the returned 20,000 sq ft space, which will free up the escalator and improve vertical circulation at the mall.
  • It has found a replacement tenant for the space vacated by Uniqlo at Tampines 1.
  • Occupancy at Frasers Centrepoint Trust’s only office asset, Central Plaza, dropped from 95.3% to 92.1% q-o-q.

1H21 rental reversions were -0.7%/-1.5% for retail/portfolio, based on new computation.

  • Frasers Centrepoint Trust changed its method of computing rental reversions, from an average of new leases over the average of expiring leases to an average of change in rents from incoming over expiring rents. 1H21 retail reversions using the old method averaged +2.9%. The change in methodology will reflect changes in rents from the time the outgoing lease was first signed.
  • The largest negative reversion of -10.5% was booked for Changi City Point. Leasing at this property remained challenging as not all employees in the surrounding business parks have returned to their offices. An absence of sales events at the Expo also cut footfall and vibrancy at the mall. Rentals were mostly reverted in the -1.2% to +1.9% range with a handful of smaller leases reverted at -5%. Frasers Centrepoint Trust continues to offer lower first-year rents with steeper second-or third-year rental step-ups for tenants still struggling. Final-year rents for such leases are expected to be in line with market rents.

Frasers Centrepoint Trust's Outlook

Impact of Code of Conduct

  • Singapore’s latest Code of Conduct for the leasing of retail premises will regulate how landlords charge items such as utilities and energy, legal fees and point-of-sale terminal costs. A low-single-digit impact on earnings is expected for Frasers Centrepoint Trust if the Code is applied to all of its leases concurrently. The Code will apply to leases signed after 1 June 2021 but not retrospectively. Hence, the financial impact will be more gradual and would be offset should atrium leasing return.

Cost rationalisation and acquisitions

  • Frasers Centrepoint Trust continues to trim costs with technology. Over the years, it has increased the number of its CCTVs and their quality to reduce the number of security personnel required. It has also consolidated fire-command centres for all its malls to reduce duplication and manpower costs. It intends to do the same for mall-cleaning services and optimise all mall performances through economies of scale. While immediate savings are not substantial, costs could be kept in check even as wages climb.
  • Frasers Centrepoint Trust will look at acquisitions opportunistically, focusing on Singapore and suburban retailing. Acquisitions could come from its sponsor’s pipeline of assets, increasing its stake in Waterway Point, or acquiring or partnering companies with only one mall in their portfolios. The cost of implementing and maintaining loyalty programmes or omnichannel infrastructure is higher for single-mall owners, which may present acquisition opportunities.

Maintain BUY, DDM target price lowered from S$2.93 to S$2.88

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2021-04-27
SGX Stock Analyst Report BUY MAINTAIN BUY 2.88 DOWN 2.930