Maintain NEUTRAL and TP of SGD2.45, 7% upside. Frasers Centrepoint Trust’s suburban malls have been performing steadily YTD-2022, with portfolio tenant sales YTD-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. 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 FCT, 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 >SGD4bn(estimated NPI yield of 4-4.5%) (Mercatus Asset Sale). Mercatus’ four suburban malls (Jurong Point, AMK Hub, Nex, and Thomson Plaza) in our view presents a good strategic fit to FCT’s portfolio and could further boost the REITs standing as a dominant suburban mall player in Singapore. FCT’s low gearing of 33% presents a good debt headroom of >SGD1bn, and we also see the possibility of FCT 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 FCT’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 FCT is in a better position to weather rising utility rates. On the debt front, c.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 its 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 QoQ to 97.8%, with all of it malls showing improved or steady occupancy QoQ. 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, with eight of its nine assets certified Green Mark Gold, or higher, and high level of earnings transparency. Based on our proprietary in-house methodology, we derive an ESG score of 3.1 out of 4.0. As this is one notch above the country median, we apply a 2% premium.
