Analysts at DBS Group Research, Citi Research, CGS-CIMB Research, UOB Kay Hian and Maybank Securities are keeping their “buy” and "add" calls on Frasers Centrepoint Trust J69U (FCT), while the analyst at RHB Bank Singapore maintains his “neutral” call.
While Citi, DBS and UOB have kept their target prices of $2.52, $2.60 and $2.70 respectively, Maybank, RHB and CGS have raised their respective target prices to $2.40 from $2.25, $2.30 from $2.12 and $2.54 from $2.52.
For FCT’s 1QFY2024 ended Dec 31, 2023, FCT, which owns a portfolio of suburban malls, reported a committed occupancy of 99.9%, up 1.5% y-o-y, and up 0.2% q-o-q.
Shopper traffic grew by 3.1% y-o-y but tenants’ sales declined 0.7% y-o-y, although post-adjustment for tenants under renovation, tenants’ sales would have been up 1.1% y-o-y, which puts it at about 118% of pre-Covid levels. DBS finds this “surprising” as outbound normalisation encroaches into domestic retail spend.
Meanwhile, FCT’s first batch of retail units at Tampines 1 which had undergone asset enhancement initiative (AEI) commenced trading in December 2023, achieving a leasing commitment of 97% and is on track to be complete by September this year.
Read more: Frasers Centrepoint Trust reports 99.9% retail committed occupancy in business update
In its 1QFY2024, FCT’s aggregate leverage declined 2.1 percentage points (ppts) q-o-q to 37.2%.
Allgreen, owned by the Kuok family, is in the process of acquiring Seletar Mall, which DBS estimates will be at a deal cap rate of about 3.9% to 4.3%.
Using the Seletar Mall transaction as a reference, it has put FCT's acquisition of a partial stake in Nex last year at a cap rate of 4.8%, in a favourable light. The acquisition of a 50% stake in Nex was made jointly by FCT and its sponsor Frasers Properties.
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DBS believes that Frasers Properties will continue to lend support to FCT's acquisition targets by unwinding additional stakes in Nex into FCT at the flat cap rate of 4.8%, notwithstanding the valuation gains last year.
"While this will help FCT reach an intermittent goal of 50%, the end goal will still be to fully unwind NEX into the portfolio and attain tax transparency, to fulfil the full potential of DPU accretion from the asset, which we see as a catalyst for the coming years," says DBS.
Meanwhile, UOBKH analyst Jonathan Koh likes the REIT's dominance in the suburban mall space.
Koh writes: "According to CISTRI, FCT has the largest market share of 10.5% for suburban malls’ floor space, ahead of CICT at 9.6% as of Mar 23. It serves a population catchment of 2.6 milion, which is close to half of Singapore’s population."
On the other hand, Citi analyst Brandon Lee is cheered by how FCT was able to extract strong rent reversion in 1QFY2024, as it was quite significantly in excess of FY2023’s hike of 4.7%.
Lee is also positive by how FCT has managed new and cheaper hedges at less than 4% in 1Q2024, which should improve all-in debt cost (likely to be in the low 4% in FY2024) and increase fixed/hedged debt proportion to 72% from current 63%.
“Due to drawdown of new loans to fund distributions and Tampines 1’s AEI), 1QFY2024 gearing of 37.2% came in higher than earlier-forecasted 36.1%,” says Lee, who sees plenty of organic growth drivers in Nex as well.
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Maybank’s Krishna Guha has similar sentiments, as he points out that FCT's 1QFY2024 update underscored the resilience of well-located malls and the importance of portfolio reconstitution and AEIs.
While the trust’s hedging cost has gone down, Guha remains cautious about the impact of higher borrowing costs, which reflects ongoing repricing. He expects FCT’s borrowing cost to rise from 2.2% to 4.3% by 2025.
Guha is also forecasting FCT's distribution per unit (DPU) between FY2023 and FY2026 to grow at a CAGR of 1.8%, led by FCT’s growth in passing rents, higher ancillary income and service charges.
Upside factors noted by the analyst include an earlier-than-expected pick-up in leasing demand for retail space driving improvement in occupancy and better-than-anticipated rental reversions.
On the other hand, downside factors include the prolonged slowdown in economic activity, which could reduce demand for retail space, resulting in lower occupancy and rental rates.
Guha adds that the termination of long-term leases could also contribute to a weaker portfolio tenant retention rate, and a sharper-than-expected rise in interest rates could increase the cost of debt and negatively impact earnings, with a higher cost of capital lowering valuations.
On FCT's NEX acquisition, CGS-CIMB analysts Natalie Ong and Lock Mun Yee expect it to be DPU-neutral in FY2024, based on their assumed mid-March completion date, compared to the FY2023 pro-forma DPU accretion of 0.4% on a full-year basis estimated by the REIT.
They add that FCT anticipates that its pro forma gearing will be 37.8% after a S$200 million private placement, compared to approximately 40% if the acquisition had been fully funded by debt.
"We estimate that this funding structure will provide around $120 million debt headroom for asset enhancement initiatives without getting too close to investors’ physiological gearing limit of 40%," writes Ong and Lock.
Re-rating catalysts noted by the analysts include stronger-than-forecast reversions and acquisition of the remaining stakes in Waterway Point and NEX, while downside risks include the a slowdown in consumer spending, which would impact FCT’s ability to command positive reversions.
Lastly, RHB analyst Vijay Natarajan is less bullish than his peers on FCT. While he acknowledges the trust’s good set of 1QFY2024 operational numbers, healthy occupancy uplift, positive rent reversions and lower gearing, he remains ‘neutral’ on the counter and is only recommending investors to ‘buy’ on dips.
With a lower gearing, Natarajan sees room for acquisitions. “This, in our view, allows FCT to selectively add up to a 10% stake in NEX mall (25.5% stake) from its sponsor at around $210 million without tapping the equity markets,’ he says.
In addition, with occupancy levels at Central Plaza now stabilising, he sees the possibility of this being divested in FY2024 – thereby potentially adding more than $200 million in funds, which the trust could recycle to further increase its stake in NEX.
He expects FCT to have an annual operating expense (opex) saving of $1 million per annum, due to various sustainable initiatives implemented such as solar panels, food waste valorisation and water usage efficiency.
“These are positive steps in our view and show long-term benefits to FCT from the adoption of good environment, social and governance (ESG) practices,” writes Natarajan.
Key risks noted by the analyst include inflationary pressures introduced by the recent rise in the goods and service tax (GST) on retail tenants and shoppers, and the growing threat from omnichannel strategies by retailers and food delivery platforms.
Units in Frasers Centrepoint Trust closed two cents higher or 0.88% up at $2.28 on Jan 24.
