• Maintain NEUTRAL and SGD2.35 TP, 8% upside with c.5% FY24F yield. Frasers Centrepoint Trust’s 3QFY24 (Sep) business update showed stable operational numbers across its malls, with no major surprises. Tenant sales growth is starting to plateau, which could result in softer rent reversions ahead. The key catalyst remains achieving tax transparency for NEX mall income and potential divestments while the key risk is Singapore’s economic growth faltering and persistent inflation pressures. The risk-reward profile is finely balanced, and investors should accumulate on dips.

• Stable occupancy and mid-single-digit rent reversions. Its retail portfolio’s committed occupancy rate dipped by 0.2ppt to 99.7%, and management attributed this mainly to transitional vacancies. On retail rent reversions, FCT guided that these are similar levels to that of 1HFY24’s +7.5%. Tenant sales growth for the quarter, however, softened to +0.7% YoY (2QFY24: +4.3% YoY) – a sign of sales normalising from the post-pandemic spurt last year. FCT sees the recently opened Pasir Ris Mall as more of a complementary presence to its nearby malls, and does not expect any adverse impact on its tenant sales.

• Tampines 1 has achieved a full committed occupancy rate with ongoing asset enhancement initiatives (AEI) on track to be completed by end- September. The AEI, which is being undertaken at an estimated cost of SGD38m, will add ~9,000sqf of prime retail space. Post renovation, the mall has attracted good diverse tenants with 68 new-to-mall concepts and 46 new-to-FCT concepts. Overall, FCT expects to exceed its guided ROI target of 8% on AEI.

• Divestments and potential recycling of capital could be a key catalyst. Potential divestment possibilities include Central Plaza (office) with the capital being used to acquire assets from its sponsor, North Point City South Wing, or third-party assets such as The Woodleigh Mall, which has been put up for sale.

• Financing costs are expected to remain in the low 4% levels for FY24-25, based on management guidance. About 67% of its debts are hedged.

• No changes to estimates. FCT has taken various sustainability initiatives over the last few years such as the installation of solar panels, food waste valourisation, water usage efficiency and smart lifts, which are expected to result in annual opex savings of SGD1m pa. As a result, FCT commands a high ESG score of 3.4 (out of 4.0), ie three notches above country median, resulting in a 6% ESG premium embedded in our DDM-derived TP.

Source: RHB Research - 26 Jul 2024