• Suburban malls impacted by latest COVID-19 containment measures.
• Potential cut in Frasers Centrepoint Trust’s dividend payout ratio to meet near-term cash flow needs.
• Expect occupancy and rental rates to drop.
• Target Price cut to S$2.05; downgrade to HOLD.

Re-rating of the Retail Sector

• Recent measures imposed to curb the spread of COVID-19 have been carried out swiftly, and government assistance has been targeted at retaining jobs.
• Frasers Centrepoint Trust (SGX:J69U) has been quick in adopting these measures and is committed to work with its tenants to ride out these turbulent times.
• Despite its best efforts, mandatory closures of certain F&B and entertainment venues will not only impact tenants, but landlords who are likely to see a decline in shopper’s traffic and tenant sales.
• We have thus factored in the increased market risks (20-bp increase in beta), partly offset by our assumption of a lower risk-free rate (to 2.0%) and lower borrowing costs (reduction of 50bps).

Potential Implementation of a New Bill to Protect Tenants

• The COVID-19 (Temporary Measures) Bill was proposed by the Government yesterday, to protect individuals, tenants and businesses from contractual obligations. If passed, the Bill could come into force as early as mid-April. This would mean that tenants and businesses affected by the COVID-19 outbreak can seek a deferment in rental obligations for at least six months, and landlords would not be able to evict them during this period.
• We expect the retail sector to be hardest impacted by this new Bill as retail tenants have already been actively asking landlords for assistance and rebates since the onset of the COVID-19 outbreak.
• Landlords also face bad debt risk if these tenants are still not able to keep their businesses afloat after the 6-12 months deferment period.

Near-term Liquidity Crunch

• We are already starting to hear of a potential credit crunch in the market with borrowers requesting for larger loan margins.
• Despite the good intentions of the proposed Bill, REITs will face huge challenges during the 6-12 months rental deferment period as they are mandated to distribute 90-100% of distributable income for each period.
• To tackle this near-term cash flow mismatch, we lowered Frasers Centrepoint Trust’s dividend payout ratio from 100% to 93% and 98% respectively for FY19/20 and FY20/21 respectively.
• We assumed that the retained earnings will be used to fund any shortfall in cash flows, as well as for Frasers Centrepoint Trust to continue providing assistance and working on initiatives to support tenants.

Suburban Malls Will Also be Impacted by These New Measures

• Despite suburban malls proving to be more resilient against their counterparts during the onset of the pandemic, the new measures are likely to negatively impact Frasers Centrepoint Trust’s portfolio.
• We believe that Frasers Centrepoint Trust is not adverse on compromising on rental rates to retain tenants, and/or to sign new leases.
• Against the REIT’s best efforts, we expect vacancy rates to creep up as more tenants face declining sales and continued disruptions to operations. We cut rent reversions to negative 5% and increase vacancy rates by 5 ppts.

Downgrade to HOLD With a Revised Target Price of S$2.05

• With the assumptions of a cut in dividend payout ratio and decline in earnings, our FY20F DPU is now 10.3 Scents.
• Based on the revised DCF-based valuation, our new Target Price for Frasers Centrepoint Trust is S$2.05.
• Our revised DPU and Target Price suggests a target dividend yield of 5.0%.

Longer Term Growth Plan Still on the Cards

• Once the dust settles, we anticipate Frasers Centrepoint Trust to continue with its plan to grow its portfolio inorganically through the acquisition of the remaining stake in PGIM ARF fund. While timing may be delayed given the disruption from the COVID-19 outbreak, we believe that growth plans will continue to remain at the forefront of investors’ expectations.

Source: DBS Research - 2 Apr 2020