• The acquisition of a 63.1% stake in ARF will contribute to distributable income for 11 months in FY21, while generating savings from tax transparency and lower interest expense. Frasers Centrepoint Trust could also benefit from higher index weightage in the FTSE EPRA/ NAREIT Global Developed Index and potential inclusion in the reserve list of the FSSTI.
• The potential acquisition of Northpoint City South Wing has evolved to be the next catalyst.
• Frasers Centrepoint Trust provides attractive distribution yield of 5.8% for FY21. Maintain BUY.

Transformative Acquisition Adds Scale in Suburban Malls

• Frasers Centrepoint Trust (SGX:J69U)’s acquisition of the remaining 63.1% stake in AsiaRetail Fund (ARF) for S$1,057m was completed on 27 Oct 20. The acquisition added five suburban malls - Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1, bringing Frasers Centrepoint Trust’s total number of suburban malls to 11.
• Total NLA has expanded 64% to 2.3m sf and portfolio size has increased 85% to S$6,650m. It doubled Frasers Centrepoint Trust’s market share for suburban retail floor space to 10.2%, which is the second largest and a whisker away from CMT’s 10.6%.

Merger Integration in Progress

• The expanded scale enables Frasers Centrepoint Trust to offer more value and options for retailers. Frasers Centrepoint Trust plans to harness the enlarged scale to drive omni-channel retail strategies, positioning its suburban malls as “last-mile” fulfilment hubs in their immediate residential catchment.
• Frasers Centrepoint Trust has converted ARF’s asset holding companies into LLP, thereby allowing unitholders to enjoy tax transparency and eradicate the tax leakage. The larger scale also enables Frasers Centrepoint Trust to reduce operating expenses through bulk purchases.
• We estimate ARF’s properties will account for 56% of Frasers Centrepoint Trust’s gross revenue in FY21.

Acquisition of Northpoint City South Wing Evolves as the Next Catalyst

• TCC Prosperity has acquired a 50% stake in Northpoint City South Wing from Frasers Property (SGX:TQ5), valuing the property at S$1.1b, in Jul 20. The South Wing comprises a 2-storey retail podium with two basements. It houses amenities, such as Nee Soon Community Club and Yishun Bus Interchange. North Park Residences, with 920 residential homes, sits on top of the South Wing. The suburban mall has a NLA of 290,560sf. Shopper traffic and tenant sales have improved significantly since completion in Dec 17.
• Frasers Centrepoint Trust could acquire Northpoint City South Wing from Frasers Property and TCC Prosperity. Its AUM would expand from S$6.7b to S$7.8b, making Frasers Centrepoint Trust the largest landlord for suburban malls in Singapore.

Divest When the Opportunities Arise

• Frasers Centrepoint Trust has completed the divestment of Bedok Point to sponsor Frasers Property for S$108m on 9 Nov 20. Frasers Centrepoint Trust will recognise divestment gains of S$14m in 1QFY21. Bedok Point is unlikely to become the dominant mall within the Bedok Town Centre as it has no direct connectivity to the Bedok MRT station.
• Frasers Centrepoint Trust could consider divesting smaller malls, such as Anchorpoint (70,988sf) and YewTee Point (73,669sf). Anchorpoint is a freehold property, while YewTee Point enjoys high shopper traffic of 1.1m/month.
• Frasers Centrepoint Trust also owns Central Plaza, an office building with NLA of 144,250sf that is now a non-core asset post-acquisition of ARF. The office building is currently valued at S$215m or S$1,490psf. Central Plaza is co-located and forms the immediate catchment area for Tiong Bahru Plaza. It is well located at the city fringe and is served by the Tiong Bahru MRT station.
• Frasers Centrepoint Trust is not actively soliciting offers. It will consider divesting Anchorpoint, YewTee Point and Central Plaza if it receives attractive and irresistible offers.

Phase 3 of Reopening by End-20

• The multi-ministry task force on COVID-19 foresees that Singapore could enter Phase 3 of reopening by this year-end, assuming community cases remain low. The gathering size, including dining-in at restaurants, will increase from five to eight persons. Easing of safe distancing measures with Phase 3 reopening would support further recovery in shopper traffic and tenant sales.

Higher Weightage in Key Equity Indices

• The acquisition of ARF has propelled Frasers Centrepoint Trust to become the ninth largest S-REIT by market capitalisation, compared with its previous ranking of 11th.
• Frasers Centrepoint Trust’s free float has increased to S$2.6b. The increase in market capitalisation and free float would lead to a higher weightage in the FTSE EPRA/NAREIT Global Developed Index. Its weightage could increase from 0.09% to 0.13%.
• Frasers Centrepoint Trust is also a potential candidate for inclusion into the reserve list of the FSSTI.

Maintain BUY

• We maintain our earnings forecasts for Frasers Centrepoint Trust. Our target price is based on DDM (COE: 6.0%, terminal growth: 1.8%).
• Frasers Centrepoint Trust's share price catalyst:
  • Gradual but steady recovery in shopper traffic and tenant sales, accompanied by progressive easing of social distancing measures.
  • Acquisition of Northpoint City South Wing and the remaining 60% stake in Waterway Point from sponsor Frasers Property.

Source: UOB Kay Hian Research - 25 Nov 2020