• Defensive portfolio
• Sufficient debt headroom
• Valuation appears attractive

Resilient portfolio of suburban malls

We expect Frasers Centrepoint Trust (FCT) to continue its proud track record of delivering positive growth in its DPU every year since its IPO in Jul 2006. Despite the uncertain macroeconomic landscape, operational performance for FCT is likely to remain solid, as underpinned by its defensive portfolio of suburban malls in Singapore. We forecast steady DPU growth of 1.6% and 2.8% for FY16 and FY17, respectively. This translates into a CAGR of 6.6% from FY06 to FY17F.

Healthy balance sheet

FCT had a comfortable gearing ratio of 28.2%, as at 30 Sep 2015, with an average all-in cost of borrowing of 2.4%. We estimate that FCT has ample debt headroom of S$268m and S$502m before reaching an aggregate leverage ratio of 35% and 40%, respectively. We believe FCT’s healthy balance sheet would allow it to embark on accretive acquisition opportunities and asset enhancement initiatives (AEI) to drive growth ahead.

Management has earmarked Northpoint Shopping Centre as its next AEI, with a targeted ROI in the double-digit range. This would boost the diversity of its retail offerings and the mall is expected to benefit from the integration with the upcoming retail component of Northpoint City by its sponsor Frasers Centrepoint Limited.

Attractive valuations

Based on our projections, FCT offers an attractive distribution yield of 6.4% in FY16. This comes in at more than one standard deviation above its 5-year average forward distribution yield of 6.0%. Its FY16F P/B ratio of 0.96x is approximately 1.5 standard deviations below its 5-year forward mean of 1.12x. Hence, we reiterate our BUY rating and S$2.25 fair value estimate on the stock.

Source: OCBC Research - 11 Dec 2015