Frasers Centrepoint Trust - UOB Kay Hian 2022-04-28: 1HFY22 Resilient & Defensive Shield


Frasers Centrepoint Trust - 1HFY22 Resilient & Defensive Shield

  • Rent reversion turned around to positive territory at 1.7% in 1HFY22. Retail occupancy improved 0.6ppt q-o-q to 97.8% in 2QFY22. Tenant sales have surpassed pre-COVID-19 levels since Oct 21. Frasers Centrepoint Trust is a defensive shield due to its focus on necessity spending at suburban retail malls. It is well positioned to pursue acquisitions after lowering its aggregate leverage to 33.3% through divestment.
  • BUY Frasers Centrepoint Trust for a defensive distribution yield of 5.3% for FY22. Target price: S$2.96.

Frasers Centrepoint Trust's 1HFY22 Results

  • Frasers Centrepoint Trust (SGX:J69U) reported DPU of 6.136 cents for 1HFY22, up 2.3% y-o-y. It retained taxable income of S$4.8m out of prudence. Excluding the amount retained, distributable income would have increased 9.6%.
  • Repositioned to focus on dominant malls. Gross revenue and net property income (NPI) increased 1.5% and 3.8% y-o-y respectively in 1HFY22 due to full six months of contributions from the acquisition of the remaining 63.1% stake of AsiaRetail Fund (ARF), which was completed on 27 Oct 20 (five months of contributions in 1HFY21). This was offset by the divestment of Anchorpoint, Bedok Point and YewTee Point. Frasers Centrepoint Trust did not grant any rental rebate in 1HFY22.
  • Rent reversion recovered to positive territory. Frasers Centrepoint Trust achieved positive rent reversion of 1.7% (FY21: -0.6%) (first year rent of incoming lease vs final year rent of outgoing lease) and 4.1% (average vs average) in 1HFY22. Century Square recorded positive rent reversion of 8%, while Causeway Point, Waterway Point and White Sands registered positive rent reversion of 2%. Frasers Centrepoint Trust has committed to 176 leases covering 312,731sf of retail space in 1HFY22. Leases accounting for 15.2% of total retail NLA are expiring and have to be renewed in 2HFY22.
  • Occupancy cost has eased to 16.2% in 1HFY22 (FY21: 17.5%). Thus, there is room for Frasers Centrepoint Trust to push for higher rents as retailers benefit from the easing of safe distancing measures. Management will focus on replacing weak tenants with refreshed offerings that are more relevant and attractive to consumers.
  • Occupancy edges higher. Retail occupancy improved by 0.6ppt q-o-q to 97.8% in 1HFY22. The sequential improvement was led by Tampines 1, Century Square and White Sands where occupancy improved 1.7ppt, 2.3ppt and 1.3ppt respectively to 98.8%, 93.4% and 93.8%. Refreshed offerings include Scarlett (supermarket for imported products from China) at Waterway Point, Malaysia Chiak! (Malaysian street hawker food) at Tampines 1 and Chateraise (Japanese confectionery) at White Sands.
  • Tenant sales have surpassed pre-COVID-19 levels since Oct 21. Shopper traffic has improved since group size for dining in at F&B establishments was increased from two to five persons on 22 Nov 21. Work-from-home is no longer the default since Jan 22. With more employees headed back to their offices, footfall has increased during peak morning and evening hours. Group size for dining in was further increased to 10 persons on 29 Mar 22.

Conservative capital management.

  • Aggregate leverage was low at 33.3% as of Mar 22. The average all-in cost of debt remains stable at 2.2%. The proportion of borrowings hedged to fixed interest rates has increased from 58% to 68%. Management estimated that every 50bp increase in Swap Offer Rate/Singapore Overnight Rate Average has a negative impact on DPU of 0.169 cents per year.

Defensive yield from necessity consumption.

  • Frasers Centrepoint Trust’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.

From Dorscon Orange to Yellow.

  • Singapore has downgraded the Disease Outbreak Response System Condition (Dorscon) level from orange to yellow. The cap on group size of 10 persons for dining in at F&B establishments was lifted since 26 Apr 22. Safe distancing between individuals is no longer required, whether indoors or outdoors. All employees are allowed back to their workplaces since 26 Apr 22, compared with the previous limit of 75%. The substantial easing will improve shopper traffic and tenant sales at Frasers Centrepoint Trust’s suburban malls.

Cushion against the blow from higher cost of electricity.

  • Frasers Centrepoint Trust has fully hedged the electricity rates for its suburban retail malls in various tranches to reduce concentration risks. The hedges will progressively expire in FY22 and FY23, which cushions Frasers Centrepoint Trust against a sudden spike in electricity rates.

On lookout for opportunities to acquire within Singapore.

  • Frasers Centrepoint Trust’s balance sheet has deleveraged with aggregate leverage currently at 33.3%. It could tap on its sponsor pipeline, such as Northpoint City South Wing. It will also explore opportunities for acquisitions from third-party vendors, such as further increasing its stake in Waterway Point from 40% to 50%.

Frasers Centrepoint Trust - Earnings forecast revision & recommendation

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-04-28
SGX Stock Analyst Report BUY MAINTAIN BUY 2.96 DOWN 2.980