• Keep NEUTRAL with a new SGD2.07 Target Price from SGD2.55, 5% upside plus 5% yield.
• The uncertainty from COVID-19 is expected to have a profound impact on the retail sector. However, we expect Frasers Centrepoint Trust (SGX:J69U)’s suburban malls, which mainly cater for domestic necessity spending, to fare relatively better. While occupancies and rent have so far been holding up well, we expect strong near-term headwinds if the pandemic prolongs.
• Among retail REITs, Frasers Centrepoint Trust remains our preferred pick.

Retention of 50% of 2Q Distributable Income

• Retention of 50% of 2Q distributable income – to buffer the brunt of COVID-19’s impact – to be felt in 3QFY20 (Sep). While 2Q distributable income rose 25% y-o-y, DPU declined 48.7% on the 50% retention of distributable income and enlarged unit base. This retention is to buffer the rental impact from the extended circuit breaker – 7 Apr to 1 Jun – which has resulted in closures of all malls except for essential shops (eg supermarkets, pharmacies, etc) and food & beverage outlets (takeaways only).
• Additionally, the passing of a new bill allowing tenant rental deferments of up to six months has resulted in some cash flow uncertainties. So far, only one of Frasers Centrepoint Trust’s tenant has requested for a deferral. In terms of rent rebates, it is currently offering 2 months of rental waivers – including property tax rebates of 1 month – and tenants can also utilise their cash security deposits to offset one month of rent.
• In light of the extended circuit breaker announced recently, management is reviewing this package for further assistance to its tenants.

Slight Dip in Occupancy, But Rent Reversions Remain Healthy

• Overall mall occupancy dipped 1.2ppts q-o-q to 96.1%, mainly due to Northpoint City North Wing and Changi City Point (CCP). CCP saw non-renewal of two leases and pre-termination of one tenant. Leasing activities are expected to remain fairly slow, and we envisage the possibility of more short-term leases due to the circuit breaker.
• Rent reversion was a healthy 5.2%, as most of the leases were signed before COVID-19’s worsening.
• Looking ahead, we expect rent reversions to be flattish at best. 2Q shopper traffic and Dec 2019-Feb 2020 tenant sales saw 2.4% and 4% declines.

No Balance Sheet Concerns, But Interest Costs Are Likely to See An Increase

• Gearing is low at 33.3%, well below the raised 50% threshold limit, with an interest cover of 6.4x (minimum requirement: 1.5x). However, with Moody’s and Standard & Poor’s recently downgrading Frasers Centrepoint Trust’s credit rating a notch, we believe borrowings will likely see a 20-50bps rise (now: 2.44%). About 17% and 23% of FY20-21’s debts are due for refinancing.

Earnings and DDM Changes

• We have revised our FY20F-22F DPUs by 22%, 9%, and 6% to factor in rental rebates for this year, and lower occupancies and rent growth. Our COE assumption is raised 70bps to 7.5%.

Source: RHB Invest Research - 27 Apr 2020