• Record 2Q19 DPU an ode to the good times as CEO Dr Chew takes his curtain call.
• As current CEO designate Mr Richard Ng takes the reign, recent developments suggest that better days lie ahead.
• Operating performance across key malls remain strong, while Frasers Centrepoint Trust’s stake in PGIM’s AsiaRetail Fund unlocks a longer growth runway.

Maintain BUY; Target Price of S$2.60

• Maintain BUY; Target Price of $2.60 reflects our confidence in FRASERS CENTREPOINT TRUST (SGX:J69U)’s capacity to take on both the PGIM and Waterway Point acquisitions. 
• Contrary to market speculation, we believe that Frasers Centrepoint Trust 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 to 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 S$2.60 Target Price which assumes contributions from PGIM’s AsiaRetail fund and Waterway Point, which we think could soon materialise.

Key Risks to Our View

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

What's New - FCT’s 2Q19 Results

2Q19 DPU of 3.14 Scts – in line

• Frasers Centrepoint Trust set a new quarterly DPU record of 3.14 Scts in its seasonally stronger 2Q19, which represents 1.2% y-o-y growth (or 4% on a sequential basis). This was largely driven by the recognition of higher turnover rents during the Christmas (one-month lag) and Chinese New Year festive season. As a result, gross revenues increased 2.3% y-o-y to S$49.7m.
• Meanwhile, the 4.8% y-o-y jump in NPI to S$36.4m was mainly attributed to lower property tax due to writebacks of provisions that are no longer required and lower utilities expense, which more than offset the slight uptick in property manager’s fee and marketing expenses. Consequently, NPI margins increased from 71.8% (1Q19) and 71.6% (2Q18) to 73.3% in 2Q19.
• Partly lifted by approximately S$350,000 in earnings retained from previous quarters, distributions to investors +1.6% y-o-y to S$29.2m.
• Overall, 1H19 DPU of 6.16 Scts formed 49.7% of our FY19F forecasts, which was in line.

Larger malls continue to shine

• Portfolio occupancy of 96% as at 31 March 2019 was among multi-year highs and would have been substantially higher at 97.8% excluding Yishun 10 retail podium, which is currently experiencing a flux in occupancy.
• Bedok Point deliver marked improvement for the second consecutive quarter, as occupancy levels continued to rise to 88.7% in 2Q19 from 79.2% and 84.2% in 4Q18 and 1Q19 respectively. Likewise for Changi City Point, which saw a bump in occupancy to 96.7% vs 94.8% a quarter ago.
• Portfolio rental reversions for the quarter averaged +2% as strong rental reversions of +6.2% for Causeway Point and 2.7% for Northpoint City North Wing (including Yishun 10 Retail Podium) were mitigated by negative rental reversions of 5% as vacancies were addressed at Changi City Point, which constituted a larger proportion of leases that were up for renewal in 2Q19.
• For 1H19, average portfolio rental reversions of 5.4% compared to average of 3.2% for FY18 was encouraging.

Outlook

• The impact on footfall and tenant sales across Singapore retail malls following the recent opening of Jewel on 17 April will remain a key factor on investors’ minds over the near term.
• According to ground observations by the Manager, shopper traffic at Changi City Point appears to have increased since, though actual figures have yet to be disclosed.
• The Manager attributes this to a variety of factors, including improved accessibility and tenant mix. While it will take a longer time to ascertain the true impact from Jewel, plans to build sustainable differentiation through its unique outlet offering should help augment resilience.

Strategic acquisition of PGIM stake to unlock longer-term runway

• To recap, Frasers Centrepoint Trust proposed the acquisition of a 18.8% stake in PGIM Real Estate AsiaRetail Fund - the first tranche of 17.1312% was successfully completed on 4 April.
• Coupled with the Sponsor’s stake, represents a majority 66.6% share, which has several positive implications for the REIT.
• Apart from the immediate boost in its exposure to the Singapore retail scene through the Fund’s five suburban malls, also offers collaborative opportunities.
• Longer term, these malls could also be viable acquisition targets for Frasers Centrepoint Trust and thus significant yield-maximising opportunities, which have yet to be factored into our forecasts.

Source: DBS Research - 25 Apr 2019