• Maintain NEUTRAL and Target Price of SGD 2.55, 7% downside plus 4.6% yield.
• FRASERS CENTREPOINT TRUST (SGX:J69U)’s FY19 (Sep) DPU was slightly below, accounting for 98% of forecasts, mainly due to higher borrowing costs and slightly lower subsidiary contributions.
• Operationally, Frasers Centrepoint Trust remains strong with healthy occupancy improvements, coupled with continued positive rental reversions. See Frasers Centrepoint Trust Announcements.
• While Frasers Centrepoint Trust’s niche positioning as a sub-urban retail landlord offers a defensive attribute, we believe most of the positives are priced in post a strong YTD rally of +25%.

Healthy Operating Metrics Continue While Rent Growth Expected to Slow Down

• Portfolio occupancy improved 1.8ppt y-o-y to 96.5% with a healthy occupancy improvement seen across all its malls. Overall, we believe Frasers Centrepoint Trust’s suburban malls have weathered well the challenges posed from high retail supply and a sluggish retail environment on the back of its strong positioning and active management efforts.
• After registering a strong rental reversion of 4.8% in FY19, we expect rental reversions to be 2-3% in FY20F on the back of a slowdown in retail sales and a high percentage (36% of portfolio) of lease expires in malls.

A Milestone Year in Terms of Acquisitions But With Upside Priced in

• During FY19, Frasers Centrepoint Trust successfully completed the much awaited acquisition of Waterway point (40% stake) and acquired a 24.8% stake in PGIM ARF (which holds five suburban malls) investing SGD910m. The acquisition, along with associated fund raising, resulted in the stock being included in the FTSE EPRA/NAREIT index which resulted in an increased liquidity and investor base. (See SGX Market Update: Recent SGX Additions to FTSE EPRA Nareit Global Developed Index)
• Gearing post recent acquisitions remains comfortable at 32.9% and presents a healthy debt headroom of > SGD 500m for acquisitions. In the near-term, we believe Frasers Centrepoint Trust’s focus will be on extracting value from recent acquisitions and reaping synergies.
• Potential acquisition targets in the medium-term include Northpoint City North wing and the remaining stake in the PGIM portfolio. With a sizeable growth in its portfolio assets management it also guided that it is open to divest some of its smaller malls at a right price.

Key Upside/downside Risks

• Positive share price catalysts are continued yield compression across REITs sector, stronger than expected rental growth in its key malls and accretive acquisitions/divestments.
• Key downside risks are a sharp slowdown in retail sales and a continued exit of major brands/operators out of the Singapore market.

DPU and Target Price Adjustment

• We have lowered our FY20-21F DPU by 2% factoring in a slightly lower rental growth.
• We have also fine-tuned our COE assumptions to 6.8% (-10 bps) resulting in an unchanged Target Price.

Source: RHB Invest Research - 24 Oct 2019