Analysts are mixed on Frasers Centrepoint Trust (FCT) J69U following the REIT’s announcement of its results for 1HFY2023 ending in September 2023.
The REIT’s distribution per unit (DPU) was mildly lower by 0.1% year-on-year (y-o-y) to 6.13 Singapore cents, but analysts from OCBC Investment Research (OIR), UOB Kay Hian (UOBKH) and DBS Group Research (DBS) see potential in the REIT after its retail portfolio occupancy hit a high of 99.2%. Meanwhile, RHB Bank Singapore notes that its operational gains may be weighed down by interest costs.
OIR’s research team has kept its “buy” call at a target price of $2.41, an increase from $2.28 previously as it sees a “solid uplift in operating metrics'' for FCT. The team says that the REIT’s 1HFY2023 results were in-line with their expectations.
“Adjusting for income that was retained or released, we estimate that FCT’s adjusted DPU would have come in at 6.025 cents, or a decline of 3.3%. The $3 million of income that was retained in 1HFY2023 will be distributed to unitholders in 2HFY2023,” writes the OIR team.
The OIR team adds that FCT’s portfolio of suburban malls are relatively defensive and resilient in nature, and they expect FCT to benefit from Singapore’s reopening
FCT’s retail portfolio committed occupancy rate increased by 0.8 percentage points (ppt) q-o-q to 99.2%, with a strong boost from Century Square (+8.1% ppt q-o-q to 96.8%) due to the signing of a new cinema operator Cathay Cineplexes, although its opening will only happen in October 2023.
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Its rental reversions were also positive at 1.9%, or up 4.3% based on average incoming rents versus average outgoing rents. FCT’s retail portfolio tenants’ sales and shopper traffic grew 9.2% and 35.3% y-o-t, respectively, in 1HFY2023.
“The increase in tenants’ sales, coupled with positive rental reversions, helped to drive down FCT’s occupancy costs to below 16% (FY2022: 16.2%),” say the analysts.
However, the OIR team notes that FCT’s average leverage ratio increased from 33.9% as at Dec 31, 2022, to 39.6% with $76.4 of its borrowings hedged due to drawdown of loans for acquisitions.
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This was mainly due to the drawdown of borrowings for the acquisitions of an additional 10% interest in Waterway Point and 25.5% effective interest in the vehicle holding NEX.
In addition, the spike in borrowing costs and FCT’s relatively large debt maturities from FY2023 to FY2025 would likely exert downward pressure on its DPU.
“We increase our FY2023 and FY2024 DPU forecasts by 0.8% and 0.1%, respectively, and lower our risk-free rate assumption from 3.50% to 3.15%. Consequently, our fair value estimate is increased from $2.28 to $2.41,” adds the OIR team.
UOBKH’s analyst Jonathan Koh has also maintained his “buy” call with a target price of $2.52, citing healthy growth in domestic consumption resulting in the increase in shopper traffic and tenant sales for FCT’s portfolios.
As Singapore transitions to the Covid-19 endemic phase, Koh sees that FCT’s suburban malls benefit as consumers prioritise their spending on essential goods and services.
“Shopper traffic increased 35.3% y-o-y, while tenants’ sales grew 9.2% y-o-y in 1HFY2023. FCT’s tenant sales were 9% above pre-pandemic levels as of Mar 23. According to CBRE, prime retail rents for suburban malls have increased 2.8% y-o-y to $31.00 per sq ft per month in 1Q2023.” says Koh.
In addition, FCT plans to invest $38 million to enhance Tampines 1 with additional net lettable area (NLA) of 8,000 sq ft from various bonus gross floor area (GFA) schemes.
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“Leasing has gained strong traction with more than 90% of the additional NLA already precommitted. The asset enhancement initiatives (AEI) is scheduled to complete in 3Q2024. It is estimated to provide an ROI of 8% by generating higher rents, and is expected to complete in 3Q2024.” says Koh.
Similarly, DBS analysts Geraldine Wong and Derek Tan have maintained their “buy” call with a target price of $2.60, also noting that the delivery of a yield-accretive acquisition with the support of sponsor Frasers Property is the next catalyst to drive the share price higher.
Wong and Derek note that FCT’s portfolio continues to outperform that of its peers on several fronts, with tenant sales [around] 10% above pre-Covid-19 levels.
Following the completion of the debt-funded acquisition, FCT will overtake CICT to become the largest suburban shopping centre owner within Singapore with the potential to grow further through the unwinding of additional stakes in NEX mall, say the analysts.
However, RHB’s analyst Vijay Natarajan has kept a “neutral” call on FCT, with an unchanged target price of $2.10. Natarajan cites FCT’s 35% of debt rolling over in the next 18 months, and says that interest cost pressures are likely to persist.
The analyst notes a “flattish 1H DPU” as revenue growth of 7% y-o-y and higher joint venture (JV) & associate contributions from acquisitions were offset by a 75% y-o-y rise in finance costs.
“All in, interest costs rose 140 basis points (bps) y-o-y and 10 bps in the coming quarters post refinancing. About 76% of its debt is hedged with an adjusted interest coverage ratio (ICR) of 4.4 times,” says Natarajan.
Shares in FCT closed flat at $2.21 on April 28.
