Still Our Preferred Retail Pick; BUY

• FRASERS CENTREPOINT TRUST (SGX:J69U)’s 2Q19 DPU of SGD3.14cts, up 1.2% y-o-y and 3.9% q-o-q, was led by stable occupancies and a +2.0% portfolio rental reversion. We see firm leasing at its suburban mall assets, supporting our 5+% DPU CAGR forecast.
• Results were in line, but we adjust DPU for its SGD376.0m PGIM Asia Real Estate AsiaRetail Fund 18.8%-stake investment, which closes after its Mar 2019 quarter. Our DDM-based Target Price is unchanged at SGD2.60 (COE: 7.2%, LTG: 2.0%).
• Frasers Centrepoint Trust’s 5.4% DPU yield remains compelling against peers and its growth profile. It stays as our preferred retail REIT given its strengthening suburban-mall footprint, visible growth drivers, strong balance sheet and potential acquisition catalysts.
• BUY.

2Q in Line; Some Transitional Vacancies

• Revenue grew 2.3% y-o-y/0.9% q-o-q on the back of a 4.8% y-o-y/3.0% q-o-q rise in NPI. Portfolio occupancy dipped q-o-q from 96.4% to 96.0%, due to transitional vacancies at Causeway Point (CWP) and closure of its food court for renovation. Causeway Point’s occupancy fell from 98.7% to 97.4% while Northpoint City North Wing’s (NCNW) declined from 97.9% to 96.5%.
• Management has backfilled Newstead leases at Causeway Point with occupancy set to recover. Its strongest rental reversions were at Causeway Point, up 6.2%, with the renewal of 13 leases at 4.0% of the mall’s NLA. This was partly offset by a -5.0% reversion at Changi City Point (CCP), as management pushed up occupancy from 94.8% to 96.7%.
• Portfolio shopper traffic improved 2.4% y-o-y, with higher traffic except for Bedok Mall, while tenant sales dipped 1.3% y-o-y from transitional vacancies.
• We see firm leasing supporting renewal efforts into the rest of FY19, with 12.7% of expiries at Causeway Point and 43.0% at Anchorpoint, where management is hinting at a more optimistic rental threshold as it moves to close leases with its two anchor tenants.

Large Malls Set to Outperform

• Northpoint City North Wing has continued to stabilise post-AEI, with revenue up 1.9% y-o-y/0.2% q-o-q, NPI up 1.4% y-o-y/0.9% q-o-q and reversions up 2.7% (for 1.1% of its NLA). We expect shopper traffic to improve with its increasing relevance as a destination mall.
• Following its successful repositioning as an outlet mall, Changi City Point delivered +12.0% y-o-y and +24.5% y-o-y in revenue and NPI. We expect larger destination malls to be more defensive against e-commerce competition.

New CEO for Next Growth Phase

• Incoming CEO Richard Ng boasts a 27-year real-estate track record. He was previously at PGIM and CAPITALAND LIMITED (SGX:C31) and is expected to lead Frasers Centrepoint Trust’s growth as it deepens its Singapore suburban-mall footprint and closes in further towards its ROFR deals.

Source: Maybank Kim Eng Research - 24 Apr 2019