Frasers Centrepoint Trust - RHB Invest 2022-07-01: Will FCT Bag Mercatus’ Retail Assets?


Frasers Centrepoint Trust - Will FCT Bag Mercatus’ Retail Assets?

  • Frasers Centrepoint Trust (FCT, SGX:J69U)’s suburban malls have been performing steadily year-to-date-2022, with portfolio tenant sales year-to-date-April at 9% above pre-COVID-19 levels.
  • Looking ahead, we believe the key challenges for the retail sector are rising inflation curbing discretionary spending, increasing cost pressures (manpower and utility) on retail tenants, and higher GST charges kicking in.
  • Frasers Centrepoint Trust's current valuation of 1x FY22F (Sep) P/BV is fair. Key catalyst is the potential accretive acquisition of the Mercatus suburban mall portfolio.

Potential contender for Mercatus assets.

  • We see a good possibility of Frasers Centrepoint Trust, teaming along with its Sponsor to acquire four suburban retail assets from Mercatus Co-operative, a unit of NTUC Enterprise Co-operative, currently in the market with a pricing expectation of >S$4bn (estimated NPI yield of 4-4.5%) (see news report by The Business Times).
  • Mercatus’ four suburban malls (Jurong Point, AMK Hub, Nex, and Thomson Plaza) in our view presents a good strategic fit to Frasers Centrepoint Trust’s portfolio and could further boost the REITs standing as a dominant suburban mall player in Singapore.
  • Frasers Centrepoint Trust’s low gearing of 33% presents a good debt headroom of >S$1bn, and we also see the possibility of Frasers Centrepoint Trust divesting Central Plaza, which is the sole office asset in its portfolio.
  • Other possible acquisition candidates are Waterway Point (balance 60% stake) and North Point City South wing from its Sponsor.

Minimally impacted by rising utility charges and rising rates.

  • The impact of rising utility charges on Frasers Centrepoint Trust’s portfolio is minimal compared to its peers as the utility prices are fully hedged for the rest of the year (except for one). Utility hedges for most of the malls will be expiring in May next year. With utility charges only accounting for 7% of its opex, we believe Frasers Centrepoint Trust is in a better position to weather rising utility rates.
  • On the debt front, ~70% of it is currently hedged, with every 50bps rise in interest rates having a -1.3% impact on its DPU.

Tenant sales, occupancy trending in the right direction, but some challenges lie ahead.

  • Overall tenant sales at Frasers Centrepoint Trust's malls have been exceeding pre-COVID-19 levels since the start of the year though performance across the various segments remain uneven. Portfolio occupancy also rose 0.6ppt q-o-q to 97.8%, with all of it malls showing improved or steady occupancy q-o-q. 1H rent reversion was also slightly better at +1.7% (outgoing vs incoming basis) and +4% (average basis).
  • Looking ahead, the key challenges are rising inflationary pressures, manpower constraints, and GST impact, which could potentially offset the reopening impact on retailers, in our view.

Good ESG credentials

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2022-07-01
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