Frasers Centrepoint Trust - UOB Kay Hian 2022-08-31: Defensive Strength Supported By Essential Services


Frasers Centrepoint Trust - Defensive Strength Supported By Essential Services

  • Frasers Centrepoint Trust is one of the most defensive S-REITs. Essential services account for 45% of its total NLA and contribute 54.4% of gross rental income. Tenant sales have surpassed pre-pandemic levels since Oct 21, and were 11% above pre-pandemic levels in Jun 22. It can weather uncertainties due to its strong balance sheet with low aggregate leverage of 33.9%.
  • Maintain BUY recommendation on Frasers Centrepoint Trust for its defensive yield of 5.8% for FY23.

Suburban malls are resilient and defensive.

  • Frasers Centrepoint Trust (SGX:J69U)’s suburban retail malls have large population catchment and good connectivity to public transport. All its nine suburban retail malls are located on or next to MRT stations. Thus, shopper traffic was high at 136m (FY21). The portfolio serves a combined catchment population of 2.6m (46% of Singapore’s population).
  • Catering to daily necessities. Essential services, comprising F&B, supermarket & hypermarket, groceries, beauty & health and other services (personal grooming, clinics and etc), are patronised by consumers on a regular basis. Suburban malls typically have a higher proportion of retail space allocated to essential services at 40% of NLA, compared to industry average of 20-30%. Frasers Centrepoint Trust allocates an even higher 45% of NLA for essential services. This defensive segment contributes 54.4% of gross rental income.

Suburban malls benefitting from reopening.

  • Frasers Centrepoint Trust has turned around to achieve positive rent reversion of 1.7% (first year rent of incoming lease vs final year rent of outgoing lease) and 4.1% (average vs average) in 1HFY22. Shopper traffic grew 32% y-o-y in 3QFY22 with all suburban malls registering double-digit growth.
  • Tenant sales increased 23% y-o-y in 3QFY23, driven by supermarkets, beauty & healthcare, leisure & entertainment and F&B. Tenant sales have surpassed pre-pandemic levels since Oct 21 and were 11% above pre-pandemic levels in Jun 22.

Overcoming the bunching up of lease expiry in FY22.

  • Frasers Centrepoint Trust's portfolio occupancy was maintained at a healthy 97.1% as of end-Jun 22. Dominant suburban malls, such as Causeway Point, Northpoint City North Wing and Waterway Point, registered high occupancies of 99.3%, 100% and 100% respectively. Occupancy at Changi City Point improved 3.4ppt q-o-q to 96.1% as more employees returned to work at Changi Business Park. Occupancy at White Sands improved 1.3ppt q-o-q to 95.3%.
  • Frasers Centrepoint Trust has substantially completed the bulk of lease renewal required in FY22, which was initially 38.7% of total NLA.
  • Progressively back filling vacant spaces. Occupancy at Century Square dropped 10.4ppt q-o-q to 83.0% due to pre-termination by anchor tenant Filmgarde. Frasers Centrepoint Trust is in advanced negotiations with two potential replacement tenants. Management expects lease agreements to be signed in 4QFY22 and occupancy is expected to recover above 90%.

Conservative capital management.

  • Frasers Centrepoint Trust's aggregate leverage remained low at 33.9% as of Jun 22. The average all-in cost of debt increased 20bp q-o-q to 2.4%. 69% of its borrowings are hedged to fixed interest rates. Management estimated that every 50bp increase in SOR/SORA will have a negative impact on DPU of 0.17 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 and proximity to dense population catchments.
  • Frasers Centrepoint Trust is one of the most defensive S-REITs due to: its focus on essential services at suburban malls, and low aggregate leverage of 33.9%.

Optimising income from suburban malls.

  • Frasers Centrepoint Trust seeks to maximise ancillary income from gross turnover (GTO) rent, pop-up stores at retail podium (atrium space), car park charges and advertising. In aggregate, ancillary income accounts for about 10% of gross revenue.

On the lookout for acquisition opportunities within Singapore.

  • Frasers Centrepoint Trust’s balance sheet has deleveraged with aggregate leverage currently at 33.9%. 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%.

Top contender for inclusion into STI.

Frasers Centrepoint Trust - Earnings forecast revision and recommendation

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-08-31
SGX Stock Analyst Report BUY MAINTAIN BUY 2.740 SAME 2.740