Frasers Centrepoint Trust - RHB Invest 2022-12-05: Resilient But Not Immune


Frasers Centrepoint Trust - Resilient But Not Immune

  • Frasers Centrepoint Trust (SGX:J69U)’s suburban mall portfolio is expected to stay resilient in the face of a slowing economic growth but it is not immune to inflationary pressures and rising interest rates.
  • Frasers Centrepoint Trust has also seemed to have dropped out of race to acquire Mercatus malls, which we believe is not a bad news in the current challenging market conditions.
  • Overall, we expect upside from occupancy increase and rental uptick to be offset by higher financing costs and lower margins.

Not a leading contender for Mercatus’ portfolio anymore.

  • Reuters reported that Hong Kong listed Link REIT (823 HK) has emerged as the frontrunner in the race to buy the trimmed retail portfolio assets from Mercatus Co-operative Ltd. estimated at S$2.5bn. Frasers Centrepoint Trust was tipped to be among potential candidates but the latest news does not come as a surprise as challenging equity funding environment and higher debt costs have largely dimmed any accretion potential for such a portfolio.
  • In our view, Frasers Centrepoint Trust could focus instead on increasing its stake in Waterway Point (50% owned) or acquiring North Point City South Wing at the right opportunity as these assets offer greater familiarity, synergy, and value extraction potential for Frasers Centrepoint Trust.
  • With gearing at 33%, Frasers Centrepoint Trust has > S$0.5bn in debt headroom before it crosses the 40% level.

Occupancy and rents to remain firm, but expect pressure on margins.

  • Frasers Centrepoint Trust's portfolio occupancy rose 0.4ppt q-o-q to 97.5% (i.e. near full occupancy), with its three large dominant malls (Causeway Point, North Point City North Wing, and Waterway Point) registering.
  • Rent reversion saw a turnaround with +1.5% in FY22 (FY21: -0.6%) on incoming vs outgoing basis as underlying tenant sales across its malls rose 10% above pre-COVID-19 levels.
  • Occupancy cost fell to 16.2% vs 19.2% the peak in FY20. NPI margin is expected to see a ~2% compression as most of the utility rate hedges across its malls will be rolled over to high spot market rates by May 2023.
  • Frasers Centrepoint Trust currently hedged 71% of its borrowings and every 50bps increase in interest rates is expected to have a ~2% impact on its DPU.
  • In addition, Frasers Centrepoint Trust has a high ~48% of debt due for refinancing in the next two years which we expect should result in ~100bps increase in overall interest cost.

Frasers Centrepoint Trust – Valuation and recommendation

Vijay Natarajan RHB Securities Research | https://www.rhbgroup.com/ 2022-12-05
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