• 1QFY18 DPU rose 3.8% YoY
• Rental reversion +3.3% excluding BP
• Raise FV and maintain BUY

1QFY18 Results In-line With Our Expectations

Frasers Centrepoint Trust (FCT) reported a decent set of 1QFY18 results which met our expectations. Gross revenue and NPI rose 8.7% and 9.1% YoY to S$47.9m and S$34.5m, respectively, with the latter forming 24.8% of our FY18 forecast. Growth was driven largely by a rebound in revenue at Northpoint City North Wing (NPNW) following the completion of its major AEI.

DPU for the quarter came in at 3.00 S cents, representing YoY growth of 3.8% and this accounted for 24.6% of our full-year forecast. FCT elected to take 50% of its management fees in units (1QFY17: 70%), and will likely transition back to its historical practice of taking 20% of its management fees in units to prevent longer term dilution to unitholders.

Operating Metrics Largely Resilient With Exception of Bedok Point

FCT’s portfolio occupancy stood at 92.6% (+0.6 ppt QoQ), led by the 5.2 ppt rebound in occupancy at NPNW to 86.8%, as at 31 Dec 2017. Although this was slower than our expectations, we understand that there was a delay in the opening of stores for some of the tenants. However, we can take comfort that 99% of the reconfigured areas at NPNW has been leased and handed over to tenants.

Management also achieved its target of securing a 9% increase in average gross rental rates for the mall as compared with the pre-AEI period. Overall portfolio rental reversion came in at 1.0% due to the drag from Bedok Point (BP), which registered negative rental reversions of 31.2%. Excluding BP, average rental reversion for the portfolio would have increased 3.3%.

Maintain BUY

Looking ahead, we expect operational improvement at NPNW and Changi City Point as management ramps up the occupancy at these two malls. Coupled with a more positive consumer sentiment (Nov retail sales rose 5.3% YoY which was the strongest in nearly two years) and further re-rating in the S-REITs sector, we deem it appropriate to lower our cost of equity assumption to 6.5% from 6.7%.

This is also supported by FCT’s still low aggregate leverage ratio (29.4% as at 31 Dec 2017). Consequently, our fair value estimate increases from S$2.40 to S$2.49. Maintain BUY.

Source: OCBC Research - 24 Jan 2018