Another Strong Quarter, as Expected; BUY

• Frasers Centrepoint Trust’s 3Q18 DPU of SGD3.05cts, up 1.8% y-o-y, was led by stable occupancy and stronger rental reversions, and driven by Northpoint City North Wing post its AEI and Changi City Point - now a well-entrenched outlet mall.
• Following in-line results, our forecasts are unchanged, as well as DDM-based Target Price of SGD2.55 (WACC: 6.9%, LTG: 2.0%). We continue to favour Frasers Centrepoint Trust  for its strengthening suburban mall footprint, and its valuation at 5.2% DPU yield as undemanding given visible growth drivers, strong balance sheet and potential acquisition catalysts. 
• BUY.

Occupancy Stable at 94.0%, +5.0% Rental Reversion

Revenue and NPI jumped 10.9% y-o-y and 13.7% y-o-y, respectively, on better occupancies at Causeway Point (CWP) and Northpoint City North Wing (NCNW), and a +5.0% portfolio rental reversion. Stronger reversions were at NCNW, up 25.8% (mainly from a lease at 50% of renewed NLA) and Changi City Point (CCP) up 7.5%." +"

"+"The portfolio was dragged by Anchorpoint (-32.8%) as occupancy fell q-o-q from 93.3% to 87.8% with the departure of an F&B tenant at 6.6% of the mall’s NLA. Bedok Point (1.5% of its NPI) remains weak, although occupancy rose q-o-q from 77.8% to 78.1% with rental reversion up 6.1%.

Excluding Northpoint City North Wing, shopper traffic was up 1.2% y-o-y, driven by 5% y-o-y increase for Causeway Point and Changi City Point. Portfolio tenant sales rose 3.4% y-o-y, as occupancy cost improved slightly (from 16.6% in FY17) to 16.4%, which supports a stronger rental outlook.

Double-digit Growth at NCNW and CCP, Increasing Connectivity at CWP

Northpoint City North Wing’s revenue and NPI accelerated further post its AEI, at +36.0% y-o-y and 59.9% y-o-y in 3Q18 as occupancy (excluding Yishun 10 retail podium) rose q-o-q from 94.0% to 95.2%. We see shopper traffic improving given the asset’s increasing relevance as a destination mall.

Frasers Centrepoint Trust has successfully repositioned its Changi City Point asset to deliver 15.8% y-o-y and 22.3% y-o-y growth in revenue and NPI, as occupancies improved q-o-q from 90.6% to 92.6% with stronger shopper traffic from the opening of the Expo Downtown Line station driving tenant sales.

At Causeway Point, Frasers Centrepoint Trust will undertake a SGD15.0m construction of an underground pedestrian link to Woods Square from end-Feb to Dec 2019 to boost accessibility to its largest mall.

Swing Factors 

Upside 

• Earlier-than-expected pick-up in leasing demand for retail space driving improvement in occupancy. 
• Better-than-anticipated rental reversions. 
• Accretive acquisitions or redevelopment projects. 

Downside 

• Prolonged slowdown in economic activity could reduce demand for retail space, resulting in lower occupancy and rental rates. 
• Termination of long-term leases contributing to weaker portfolio tenant retention rate. 
• Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations. 

Source: Maybank Kim Eng Research - 25 Jul 2018