• Proposed acquisition of the remaining 63.1% stake in ARF and divestment of Bedok Point to lift FY22e-24e DPU by 2.9% to 3.7%.
• The transaction will further entrench FCT in the resilient suburban retail sector and strengthen FCT’s portfolio by reducing asset concentration risk.
• Maintain ACCUMULATE with a higher TP of $2.79 (prev. $2.69). We previously forecasted c.20% of FY20 distributable earnings to be retained in FY20 and disbursed in FY21. Given the sustained recovery, we opine that FCT will be able to disburse all of FY20’s distributable earnings – as such FY21e DPU was lowered by 1.4% while FY20e DPU was raised by 12.3%. FY22e to FY24e DPU was increased by 2.9% to 3.7% due to the accretive acquisition of the remaining 63.1% stake in ARF and subsequent divestment of Bedok Point.

What’s new?

FCT announced the proposed acquisition of the remaining 63.1% stake in AsiaRetail Fund Limited (ARF) from Sponsor, Frasers Property Limited (FPL). The purchase consideration of $1,057.4mn is equivalent to the NAV of ARF. PGIM ARF holds 5 suburban retail malls (Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1) and one office property (Central Plaza). The transaction will bring FCT’s stake in ARF to 100% – effectively onboarding all ARF’s assets into the FCT portfolio. This is the final step in FCT’s strategy to get full control and attain tax transparency on the assets. For reference, ARF paid $12.7mn in corporate taxes in FY2019. The acquisition will be partially funded through the issuance of 628mn new units (representing 56.1% of the total number of existing units).

FCT will also be divesting Bedok Point for $108.0mn. The divestment price represents a 2.5% yield and allows FCT to reconstitute the portfolio by acquiring higher-yielding assets with larger scale. Proceeds will be used to pare down debt. The transactions are subject to a shareholder vote at the EGM slated for 28 September 2020.

What do we think?

Acquisition will increase FCT’s exposure to the resilient suburban mall asset class. July’s tenant sales have recovered between 97% to 99% of last year’s levels. The essential and recurrent spending that occurs at suburban malls makes suburban malls a resilient asset class, evident during the circuit breaker and subsequent recovery period. The transactions will increase FCT’s suburban NLA by 79% and lower the concentration risk (from 30% to 22%) from any single asset. The growth in AUM and market capitalisation (from 12th largest to 8th largest SREIT) will also increase FCT’s scale and visibility among the SREITs. Unitholders will benefit from tax savings on the ARF assets upon LLP conversion.

Maintain ACCUMULATE with and higher TP of $2.79 (prev. $2.69).

We adjust our forecast to incorporate the acquisition of ARF and disposal of Bedok Point. We previously forecasted c.20% of FY20 distributable earnings to be retained in FY20 and disbursed in FY21. Given the sustained recovery, we forecast the FCT will be able to disburse all of FY20’s distributable earnings – as such FY21e DPU was lowered by 1.4% while FY20e DPU was raised by 12.3%. FY22e to FY24e DPU was increased by 2.9% to 3.7% due to the accretive acquisition of the remaining 63.1% stake in ARF and subsequent divestment of Bedok Point. DPU yield for FY20e/FY21e stands at 4.2%/5.2%.

Source: Phillip Capital Research - 7 Sep 2020