• DPU estimates revised to reflect timing of acquisition and higher proportion of equity funding.
• Low gearing of 32.7%, coupled with increased stake in PGIM’s AsiaRetail fund alongside Sponsor, signals longer growth runway for Frasers Centrepoint Trust.
• Higher 50% stake in Waterway Point, FTSE EPRA/Nareit index inclusion could drive further re-rating.
• BUY; higher Target Price of S$2.85 implies target yield of 4.5%.

BUY; Higher Target Price of S$2.85 as FTSE EPRA/Nareit Index Aspirant FCT Executes on Its Long Growth Runway

• We are positive on FRASERS CENTREPOINT TRUST (SGX:J69U)’s moves to acquire stakes in PGIM’s AsiaRetail fund and Waterway Point, which have transformed the group’s growth profile entirely, in our opinion. DPU is now projected to grow at a 2.8% CAGR over FY18-21F vs 1% p.a. previously – which places Frasers Centrepoint Trust favourably among the fastest-growing REITs.
• Frasers Centrepoint Trust’s share of divestment gains for Liang Court, which was concluded at end-May, translates approximately into 1.1 Scts per unit, according to our estimates, which unitholders can potentially enjoy. In addition, the successful inclusion in the FTSE EPRA/Nareit index in the medium term could drive a further share price re-rating.
• Our S$2.85 Target Price implies a 4.5% target yield, with further upside if Frasers Centrepoint Trust enlarges its stake in Waterway Point to 50%, which could boost FY20F DPU by another 4-5%, if fully debt funded.

Where We Differ

• We like Frasers Centrepoint Trust for the defensive attributes of its suburban exposure and firm growth pipeline. All of Frasers Centrepoint Trust’s properties are suburban malls, which have proven to be resilient across market cycles.
• While we anticipate a more balanced rent outlook, we believe the merits of its resilient portfolio, addition of growth engine Waterway Point and enlarged acquisition pipeline should continue to draw interest to the stock, given volatile times.

What’s Next: Opportunities Abound

An enlarged stake in PGIM.

• In our earlier note (see report: Frasers Centrepoint Trust - DBS Research 2019-03-13: Time To Catch Them All), we shared the basis for our non-consensus view on Frasers Centrepoint Trust’s capacity to take on both the PGIM investment and a 33% stake in Waterway Point, and still maintain a gearing of 35% - which falls within S&P’s assessment criteria for a BBB+ rating. Based on our estimates, a 60%/40% debt/equity funding mix for both transactions would potentially boost Frasers Centrepoint Trust’s FY18-20F DPU growth from 1.5% to 3.5% p.a.
• Both Frasers Centrepoint Trust and its Sponsor have since upsized their exposure to PGIM’s AsiaRetail Fund to 18.8% and 47.8% respectively, jointly representing a controlling 66.6% stake in the fund.

Waterway Point soon a reality, with attractive entry yield of 4.7%.

• On 16 May, Frasers Centrepoint Trust proposed the acquisition of a 33% stake in JLL and CBRE.
• Waterway Point’s against recent transactions for retail assets in Singapore.

Striking a balance between immediate DPU accretion and future acquisition capacity.

• On 17 May 2019, Frasers Centrepoint Trust launched its equity fund raising for gross proceeds of 1%. Gearing is also likely to be more conservative at 32.7%, which implies current debt headroom of approximately S$450m.

Larger 50% stake in Waterway Point a lower hanging fruit.

• Judging by Frasers Centrepoint Trust’s recent acquisition playbook, we believe its stake in Waterway Point may soon be upsized to 50% - and if executed swiftly, allows Frasers Centrepoint Trust to lock in latest asset valuations of S$1.3bn, as the mall is still in growth mode.
• Given ample debt headroom, Frasers Centrepoint Trust has the capacity to fully fund the acquisition via debt, and still keep gearing in check under 37%. Assuming the acquisition was made at the start of FY20F, we estimate it could drive FY20F DPU from 12.8 Scts to 13.4 Scts (+4.7%).

Further 4% Boost to Share Price Is Possible If Index Inclusion Materialises

• On 4 March 2019, sister REIT FRASERS LOGISTICS & INDUSTRIAL TRUST (SGX:BUOU) announced its inclusion in the FTSE EPRA/Nareit Global Real Estate Index Series (Global Developed Index) from 19 March 2019. In the week that followed, Frasers Logistics & Industrial Trust outperformed its preferential offer on 18 June, a deeper look into FTSE EPRA Nareit’s main ground rules places Frasers Centrepoint Trust favourably for a possible index inclusion as early as September 2019, which could further re-rate its share price.

Special Dividends on the Cards After Divesting Liang Court at 3.4% Yield?

• Based on the consideration of S$400m, the sale of Liang Court should yield approximately S$100m in divestment gains for PGIM’s one-off special increase in FY19F distributable bump-up in DPU.

Securing a Long Growth Runway for the REIT

• Having secured a combined 66.62% stake Singapore, apart from the Sponsor’s ROFR (Northpoint South Wing).
• Importantly, these assets are positioned to growing markets, which bode well for rent reversionary outlook. Selected properties also offer value-maximising opportunities through potential AEIs, revamps and/or tenant improvement initiatives, which provide an added layer of Frasers Centrepoint Trust will see its Singapore retail footprint nearly double to 12 malls (excluding Liang Court) and transform its growth profile entirely.

Valuation

• Maintain BUY; Target Price raised to S$2.85. While implied FY20F target yield of 4.5% is at +1SD of Frasers Centrepoint Trust’s historical valuation, this is supported by Frasers Centrepoint Trust’s longer growth runway post moves to acquire stakes in PGIM’s AsiaRetail fund and Waterway Point.

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.

Source: DBS Research - 24 Jun 2019