In Line, Stay at HOLD. Prefer SPHREIT

• FRASERS CENTREPOINT TRUST (SGX:J69U)’s 1Q20 DPU of SGD3.06cts (+1.3% y-o-y) was in line with both consensus and our estimate.
• Occupancies improved across most assets, while rental reversion was a stronger-than-expected +5.0%. Earlier deals will continue to support its DPU growth. But while its suburban retail growth strategy is intact, we see rental growth moderating on its assets due to slowing retail sales. Also, upside catalysts from further acquisitions are not yet visible, given Singapore’s tight retail cap rates. Our forecasts and DDM-based Target Price are unchanged at $2.85.

Better occupancies, +5.0% rental reversion

• Revenue increased 1.0% y-o-y due to better portfolio occupancy (up q-o-q from 96.5% to 97.3%) and higher contributions at Northpoint City North Wing, Changi City Point, Yew Tee Point and Bedok Point. Causeway Point’s occupancy improved from 97.0% to 97.8% with completion of underpass AEI works, while Waterway Point’s occupancy dipped slightly (from 98.0% to 97.3%) due to transitory vacancies.
• Rental reversion was strong at +5.0%, mainly due to Causeway Point (+7.1%), Changi City Point (+5.1%) and Anchor Point (+5.1%). Portfolio shopper traffic rose by 8.4% y-o-y, but tenants’ sales (on psf) fell by 0.5% y-o-y, in line with an overall weak Singapore retail sales outlook.

Rents Well-supported by Lease Expiry Profile

• 81% of its leases by NLA that will be renewed in FY20 are concentrated at its four largest and better performing malls. Management strives to drive yield improvements on its assets. We see low single-digit reversions, and expect rental growth to be backed by limited new supply within the respective micro-markets.

Low Deal Visibility for Now

• Frasers Centrepoint Trust's gearing at 33.2% as of end-Dec 2019 implies SGD0.6-1.0b in debt headroom. We see limited visibility on its acquisition growth pipeline, given the lower Singapore retail cap rates and those from its sponsor. The Northpoint City South Wing is undergoing a tenancy rejig with the opening of its new bus interchange, and the asset has not yet stabilised.

Source: Maybank Kim Eng Research - 23 Jan 2020