Frasers Centrepoint Trust – All the right moves, in all the right places

Posted on by POEMS Dealing Team

The Positives

+ Better performance despite softer retail sector outlook. Shopper traffic up 6.1% YoY, due to higher traffic at NPNW and YewTee Point. Tenant sales psf grew a modest 2.9% YoY for the two months ending May 2019. Revenue improved 1.6% YoY with all malls recording higher revenues, save for Causeway Point (CWP) whose occupancy took a hit due to AEI works for the underground pedestrian link (TBC December 2019). Largest contributors to revenue growth were NPNW (+3.8%), Changi City Point (+5.5%) and Bedok Point (+13.9%).

+ Higher portfolio occupancy and positive rental reversions. Portfolio occupancy improved from 96.0% to 96.8%. Better occupancy at all malls except Changi City Point (-30bps) and Anchorpoint (occupancy unchanged). Significant improvements in occupancy at Bedok Point (88.7% to 95.0%), YewTee Point (94.1% to 96.5%) and Northpoint City North Wing (NPNW) (96.5% to 97.1%). Positive rental reversions at all malls, except YewTee Point (-2.5%), with reversions for the portfolio as a whole coming in at +3.1%.

Find out how to buy Singapore shares. 

The Negatives

– Post-Waterway Point acquisition gearing increased to 32.7% (FY18 28.6%) and lower interest coverage ratio of 4.5x (FY18 5.6x). Gearing increased a significant 410bps post-Waterway Point acquisition. However, the gearing of 32.7% is still conservative in our view, given the gearing limit of 45%. Borrowing cost ticked up 10bps to 2.7% due to higher percentage of borrowing on fixed cost (3Q19/FY18 67%/64%).

 

Outlook

FCT’s malls are located in suburban residential areas with comparatively lower retail space per capita, for instance, <3 sqft of mall floorspace per capita versus >6 sqft in the central parts of Singapore (Figure 1). FCT’s biggest asset, CWP, stands to gain tremendously from the transformation of Woodlands Regional Centre, which will anchor itself as the largest economic hub in the North region. Waterway Point (33.3% stake), FCT’s latest acquisition, is also primed to benefit from the absence of supply coming onto the outer north-east area, and will likely remain the dominant mall.

FCT’s interest in PGIM increased from 18.8% to 21.13% due to the redemption of PGIM shareholders from the fund. Together with Sponsor Frasers Property Ltd’s (FPL) 53.74% stake, the group has a 74.87% stake in PGIM. As a private fund, PGIM does not enjoy tax transparency treatment that FCT does – we estimate PGIM’s tax rate to be approximately 10% – 15%. PGIM’s portfolio consists of several suburban retail malls and further entrenches FCT’s presence in the suburban retail space. With the group’s controlling stake in PGIM, FCT’s acquisition of some of PGIM’s assets appears to be in the cards and would yield immediate tax savings.

 

Upgrade to ACCUMULATE with higher TP of S$2.77 (prev. S$2.31).

We adjusted our forecast to account for the acquisition of the 33.3% stake in Waterway Point and FCT’s increased stake in PGIM. We reduced the risk-free rate owing to the lower interest rate environment – and in doing so, our cost of equity is reduced from 6.90% to 6.55%. We believe there is further upside to FCT’s valuation, with growth catalysts stemming from

  • Pipeline assets (Figure 2)
  • Possible acquisition of PGIM’s assets (Figure 3)
  • Re-positioning of CWP
  • FCT’s capability to tap on the renewed strength in fringe retail rents (Figure 4).
Important Notice and Disclaimer
This communication (“Communication”) is from one of Phillip Capital Limited AFSL 246827, Phillip Capital Trading Pty Ltd AFSL 246796 or Phillip Asset Management Limited (AFSL 246848) (together “PhillipCapital”).

This Communication and its information is not an offer, solicitation or specific recommendation with respect to the purchase or sale of any securities, nor is it circulated to invite offers to purchase any securities. The information in this Communication is for your general information only. The information in this Communication does not take into account the particular investment objectives, financial situation or needs of any person. Before acting on the information in this Communication, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

In the event this Communication or the information in this Communication refers to securities in one or more legal entities, PhillipCapital and its associates may hold securities in those legal entities.

PhillipCapital does not represent that the information contained in this Communication is accurate, complete or up to date and it should not be relied upon as such. The information in this Communication is subject to change without notice. No warranties of accuracy, reliability or completeness are given (except insofar as liability under any statute cannot be excluded) in respect of the information in this Communication. PhillipCapital, its directors, employees, representatives and agents do not accept any liability (including, without limitation, any liability arising from fault or negligence on the part of any of them) for any loss whatsoever arising from any reliance on or use of the information in this Communication or otherwise arising in connection with it.

This Communication and the information within this Communication is not intended for retail investors outside of Australia and must not be distributed to retail investors outside of Australia. This Communication is not intended for and may not be distributed in the United States.

The information in this Communication has been provided to you for personal use only and must not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this Communication by mistake, please delete or destroy it, and notify PhillipCapital immediately.