• Strong operational assets backed by dominant retail assets in key suburban locations.
• Visible pipeline of attractive assets to anchor its position as one of the leading suburban retail owners in Singapore.
• Pure-play Singapore focus a plus.

BUY With Target Price of S$2.95 as FCT Is Expected to Rise to Greater Heights

• We are positive on FRASERS CENTREPOINT TRUST (SGX:J69U)’s moves to acquire stakes in PGIM’s AsiaRetail fund and Waterway Point in FY19 which will drive the REIT’s forward distributable income growth of 6.0% and potential upside if it continues to execute on more acquisitions.
• As one of the few Singapore-focused S-REITs offering strong income visibility and an attractive pipeline of quality assets from the Sponsor, Frasers Centrepoint Trust has the potential to double its AUM over the longer term. BUY!

What's New

4QFY19 DPU rose by 1.8% y-o-y to 2.913 Scts; FY19 DPU of 12.07 Scts in line with estimates

• Frasers Centrepoint Trust's 4QFY19 DPU rose by 1.8% y-o-y to 2.913 Scts on the back of a 17.9% rise in distributable income. During the quarter, revenues and net property income were 0.5% and 0.1% lower y-o-y respectively due to the accounting treatment of FRS 116 and FRS 109, which are non-cash in nature. Adjusting for these changes, revenues and net property income would have been 2.8% and 4.8% higher y-o-y to S$49.6m and S$34.1m respectively. See Frasers Centrepoint Trust Announcements.
• Higher contributions from associates owing to the phased investments in Waterway point, PGIM ARF boost distributions higher y-o-y.
• On a full-year basis, distributions rose by 6.6% to S$118.7m, distribution to unitholders rose by a tad higher at 7.5% owing to payment of cash retained from past years. DPU of 12.07 Scts is in line with our expectations. See Frasers Centrepoint Trust Dividend History.

Positive revaluations across the portfolio

• Frasers Centrepoint Trust reported a positive revaluation gain of S$93.3m, mainly from higher valuation from Causeway Point, which we attribute to stronger cashflows achieved, coupled with boost from its ongoing AEIs at the basement link.
• Portfolio cap rates remain stable at 4.75-5.00% for its larger malls, while its small malls of Anchorpoint (4.5%) and Yishun 10 retail podium (3.75%) are tighter due to their freehold and strata status respectively.

Strong operating performance; demonstrates the defensiveness of suburban malls amid concerns over competition from Jewel.

• Portfolio occupancy maintained at a high of 96.5% vs 96.8% in the previous quarter. We saw a dip in occupancy rates at Causeway point (0.5ppt q-o-q to 97%) and Changi City Point (CCP) (down to 95.9% from 96.4% a quarter ago) and a dip to 79% at Anchorpoint (vs 95% a quarter ago), which are transitionary in nature as the manager looks to actively manage its tenant mix there. Bedok Point continues to build on the positive momentum a quarter ago and achieved a high occupancy rate of 95.7%.
• Meanwhile, portfolio rental reversions averaged +3.9% in 4Q19, reflecting sequential improvements vs +3.1% in 3Q19. Reversions was 4.5% (excluding Waterway Point) for FY19 or 4.8% including Waterway Point.
• Shopper traffic also increased 8.9% y-o-y, led by Northpoint City and Tenant sales (S$ pf) basis was flat y-o-y, the latter affected by the AEI at Causeway Point.
• Its key properties of Northpoint City North Wing, Changi City Point and Waterway Point registered healthy tenant sales growth of 2.0-6.0%. This reaffirms our view that Frasers Centrepoint Trust’s portfolio, by virtue of its location and tenant positioning, continues to attract healthy traffic and sales, despite the ongoing narratives of disruption from e-commerce.

FY20 growth “in the bag”; a visible pipeline which could double its portfolio size

• Looking ahead, the manager has 457,000 sqft (or 35.7% of its rental income) up for renewal of which 44% has been pre-committed with positive rental reversions achieved. This greatly reduces the perceived uncertainty that Frasers Centrepoint Trust faces in FY20 given its fairly high level of expiries to address. Given the upward momentum in tenant sales which grew fairly in line with rental reversionary trends, occupancy costs remained at a stable 16- 18% level.
• In our projections, we see growth in DPUs boosted from the full-year contribution of Waterway Point and PGIM ARF, which will further enhance Frasers Centrepoint Trust's growth profile in the upcoming quarters. The ongoing AEI at Causeway Point is also on track for completion by end-2019, which should further anchor the mall’s dominance in the North and growth trajectory in the medium term.
• Additionally, we believe that Frasers Centrepoint Trust’s recent inclusion in the EPRA NAREIT Developed Asia Index in September 2019 heralds a new era of improved visibility which will lead to the REIT staying at a more compressed yield range compared to historically. (See SGX Market Update: Recent SGX Additions to FTSE EPRA Nareit Global Developed Index)
• In addition, an attractive pipeline of potential injections from the Sponsor (Northpoint City South Wing and the Sponsor’s stake in PGIM ARF over time) are key magnets to keep investors vested in the stock.

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 and in our view, will stand out amidst a more modest growth outlook.
• While we anticipate a more balanced rent outlook across its malls, we believe the merits of its resilient portfolio, addition of growth engine Waterway Point, and enlarged acquisition pipeline should continue to stock, given volatile times.

Valuation

• Maintain BUY; Target price maintained at S$2.95. See Frasers Centrepoint Trust Share Price; Frasers Centrepoint Trust Target Price.
• While implied FY20F target yield of 4.3% is above +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 ay Point.

Source: DBS Research - 24 Oct 2019