• Contrary to market expectations, we see Frasers Centrepoint Trust (SGX:J69U) delivering on not one, but two M&A transactions this year. 
• PGIM deal and Waterway Point combined could double Frasers Centrepoint Trust’s FY18-20F DPU growth from 1.5% to 3.5% p.a. 
• An equity fund raising will be well supported as it addresses current liquidity constraints. 
• Target Price raised to S$2.60, with further upside if a larger stake in Waterway Point is acquired; Maintain BUY! 

Target Price Raised to S$2.60 as We See the Dual Acquisition of Stakes in PGIM and Waterway Point Revitalising Growth

• Contrary to market speculation, we believe that Frasers Centrepoint Trust (SGX:J69U) has ample capacity to take on both the PGIM investment and its Sponsor’s 33% stake in Waterway Point, and still maintain optimal gearing of 35%.
• Given the Punggol submarket’s consistent outperformance and firm organic growth outlook, this would be a good time for Frasers Centrepoint Trust to acquire Waterway Point. Assuming a 60%/40% debt/equity funding mix for both transactions, we could see Frasers Centrepoint Trust’s FY18-20F DPU growth jump from 1.5% to at least 3.5% p.a. – which would place Frasers Centrepoint Trust favourably among the fastest-growing REITs.
• Our S$2.60 Target Price implies a target yield of 5%, with further upside if Frasers Centrepoint Trust is able to acquire a larger stake in Waterway Point.

Where We Differ

• We continue to like Frasers Centrepoint Trust for the defensive attributes of its suburban exposure. All of Frasers Centrepoint Trust’s properties are suburban malls, which have proven to be resilient across market cycles. While we anticipate
  1. higher interest rates,
  2. higher proportion of management fees paid in cash, and
  3. a more balanced rent outlook,
• we believe the merits of its resilient portfolio and low gearing should continue to draw interest in the stock, given volatile times.

Potential Catalyst

• A higher proportion of debt vs equity funding or acquisition of a larger-than-anticipated stake (up to 50%) in Waterway Point will further improve Frasers Centrepoint Trust’s DPU growth profile.

Valuation

• BUY with a higher S$2.60 Target Price after imputing contributions from PGIM’s AsiaRetail fund and Waterway Point, which we think could soon materialise.
• Total potential return is 20% inclusive of share price upside and nearly 6% forward yield.

Key Risks to Our View

• Interest rate risks. Exposure to floating interest rates could increase Frasers Centrepoint Trust’s finance cost, thereby pressuring DPU, should interest rates creep up unexpectedly.

What's New - Myriad of Opportunities Driving Growth

FCT to invest in PGIM’s retail-focused real estate fund.

• On 28 February, Frasers Centrepoint Trust proposed the acquisition of a 17.1% stake in PGIM Real Estate Asia Retail Fund Limited – the largest non-listed retail mall fund in Singapore, for approximately S$342.5m.
• The portfolio is largely suburban, comprising six retail malls – Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square, Tampines 1 and Liang Court, and an office property (Central Plaza) in Singapore, and four retail assets in Malaysia.
• The Manager plans to fund the acquisition via a combination of debt and equity. Depending on the mix, implies pro-forma DPU impact of +0.3% to +3.6%, according to the REIT as follows:

A divided street but we are positive on the strategic move, which does not preclude Frasers Centrepoint Trust from pursuing further M&A.

• Despite expectations of a respectable 0.3% to 3.6% DPU accretion (depending on the funding mix), investors’ views have been mixed. Overall, given the lack of investible assets in Singapore, the move is slightly positive, with key concerns mainly centred on
  1. limitations from being a passive investor, and
  2. implications for further M&A opportunities given higher gearing levels, which are short-term in nature.
• Apart from concerns over the lack of immediate control and incremental fees under the fund-of-funds structure aside, we see potential for Frasers Centrepoint Trust to play a more active role ahead, given its combined 35% stake alongside the Sponsor and track record in turning around malls. The ability to accumulate a larger stake (or even 100%) in the fund will also be positive for Frasers Centrepoint Trust, in our opinion. Meanwhile, the prospect of immediate DPU accretion appears attractive.
• Further, our analysis leads us to believe that the PGIM deal does not preclude Frasers Centrepoint Trust from acquiring Waterway Point from the Sponsor later on. If this materialises, assuming S$300m of equity funding, we could see Frasers Centrepoint Trust rising quickly to take its place as the largest S-REIT within the Frasers group, potentially overtaking CapitaLand Mall Trust (SGX:C38U) in terms of growth as FY18-20F DPU CAGR jumps from 1.5% to over 3.5% p.a.

Doubling Down on Singapore’s Suburban Retail Scene

Rare opportunity, undemanding valuations.

• We see this as a significant opportunity for Frasers Centrepoint Trust to build an additional pipeline apart from the ROFR from its Sponsor (inclusive of Waterway Point, Northpoint South Wing). Notably, the underlying malls held under the fund have a similar DNA to Frasers Centrepoint Trust’s anchor malls – dominant suburban retail spaces with a strong catchment allowing stable earnings through market cycles.
• At first glance, net yield of 1.2% (based on 100% debt funding) may seem unattractive, but after adjusting for structural differences between fund-based vs physical asset transactions, this implies current NPI yield of at least 4.7%, which compares well against recent transactions in the physical market.
• On an NLA basis, valuations for PGIM’s Singapore asset portfolio works out to S$2,067 psf, a steep 25% and 40% discount to Westgate’s and Jurong Point’s S$2,746 psf and S$3,343 psf respectively, which appears conservative:
• In addition to Frasers Centrepoint Trust’s proposed 17.1% stake, we note that the Sponsor Frasers Property (SGX:TQ5) also recently announced plans to acquire an additional 17.8% stake in the fund, which we believe could be injected into the REIT over time, further bolstering returns.

Strong portfolio metrics...

• Complementary asset categories and submarket exposures are key investment attributes. A deeper look into AsiaMalls’ Singapore portfolio assets further affirms its quality, with several value-unlocking opportunities in store.
• Zooming into the underlying asset fundamentals, we like the PGIM portfolio primarily for its exposure to the Tampines/Pasir Ris catchment area – one of the best-performing retail mall clusters historically, and inroads to the Tiong Bahru (Bukit Merah) catchment, which enjoys limited competing supply.
• According to AsiaMalls, Tiong Bahru Plaza alone attracts over 19m visitors annually vs Causeway Point’s 25.5m for FY18.

… with room for growth.

• Malls such as White Sands, Tiong Bahru Plaza and Century Square have successfully undergone major revamps in recent year - Hougang Mall and Liang Court could be next, though firm renovation plans have yet to be revealed. A complete redevelopment of Liang Court mall, together with the adjoining 403-room Novotel Clarke Quay Hotel and Somerset Liang Court Service Apartment, is also plausible and offers significant untapped potential.
• Near-term, we believe that growth should primarily be driven by positive rent reversions at its refurbished properties, which are positioned to growing markets.
• Additionally, while AsiaMalls’s underlying tenant profiles are generally similar to Frasers Centrepoint Trust’s, they leave room for further tenant portfolio-optimising opportunities ahead, given a slightly higher proportion of traditional retail vs experiential concepts currently (refer to charts on page4 of attached PDF report).

Source: DBS Research - 13 Mar 2019