NEUTRAL, new SGD2.10 TP from SGD2.09, 6% downside, 6% FY23F (Sep) yield. Frasers Centrepoint Trust’s announcement of acquiring a 25.5% stake in the suburban mall NEX came as a surprise. Overall, we are neutral on the deal – while we like the long-term strategic fit and synergies, tight pricing and high funding costs limits yield accretion. Operating metrics continue to trend higher, but FCT’s short debt maturity and low debt hedge vs that of comparable peers will negate most of the gains moving forward.
NEX acquisition is a long-term gain. FCT (51% interest) and its sponsor Frasers Property announced the acquisition of a 50% stake in NEX at an agreed purchase price of SGD2.08bn (SGD3,274 per NLA). The acquisition is at par with NEX’s latest valuation but this is also 6% higher than the mall’s appraised value in 2021 – and translates to high 4% NPI yield (estimated at c.4.7%). Comparatively, vendor Mercatus sold its other two malls recently at a c.6% discount to book value. There will also be no tax transparency from mall income at this stage. NEX, however, is an excellent strategic fit for FCT, and offers good synergy due to its dominant profile in northeast Singapore, as well as its good connectivity (it sits on top of two Mass Rapid Transit lines). It is 99.9%-occupied at present, and has a remaining lease period of 85 years. It also has a high Green Mark rating.
Mildly yield-accretive, with a post-acquisition gearing of 38.5%. FCT will fund its equity share of SGD340m for acquisition by taking on 3-year debt at an estimated all-in cost of 4.3% pa. DPU accretion (pro forma FY22) will be a mild 0.5%, assuming full debt funding. Looking ahead, FCT will look at potential divestment opportunities and also possible equity-raising at the right opportunity to shore up its balance sheet.
Improving operating metrics... Its portfolio occupancy rate (1QFY23) rose 0.9ppt QoQ to 98.4%, mainly aided by Changi City Point, Century Square and White Sands coupled with positive rent reversions. This was in tandem with a 13.4% YoY growth in tenant sales during the quarter (c.16% higher than pre-pandemic levels). That said, tenant sales growth should moderate to low single digits ahead due to the economic slowdown and Goods and Services Tax rate increase. FCT also announced a SGD38m asset enhancement exercise for Tampines 1, with an estimated c.8% ROI.
…negated by a sharp rise in interest costs. About 73% of FCT’s debt is on fixed interest rates as of end Dec 2022 (Sep 2022: 71%), ie on the lower side vs that of most peers. All-in interest cost (1QFY23) rose 50bps QoQ to 3.5%. More importantly, FCT has a high proportion of c.45% of debt due for expiry in FY23-24F, which will likely be rolled over at low 4% levels.
We lift FY23-25F DPU by 0-2% afterfactoring in acquisition and funding costs. FCT’s ESG score of 3.2 out of 4.0is two notches above the country median, so we apply a 4% premium to its intrinsic value to derive our TP.
