Analysts from CGS-CIMB Research, Maybank Research and Phillip Securities Research have maintained their “add”, “buy” and “accumulate” calls for Frasers Centrepoint Trust J69U with unchanged target prices of $2.62, $2.35 and $2.35, respectively.
In their report dated July 26, analysts Natalie Ong and Lock Mun Yee of CGS-CIMB cite “upbeat tenant sentiment” as FCT maintained a high occupancy rate in 3QFY2023 ended June 30 with healthy leasing momentum.
Although FCT did not provide financial information in its business update for the period, the analysts note that retail occupancy remains high despite slipping 0.5 percentage points q-o-q from 99.2% to 98.7% at end-June.
Ong and Lock add that FCT signed 7.2% of leases by gross rental income (GRI) during the quarter, while another 4.2% of GRI will expire in 2HFY2023.
Meanwhile, 3QFY2023 tenant sales rose 5% y-o-y, reaching 118% of 3QFY2019’s levels as trade sectors such as F&B, fashion, electronics and beauty saw good sales growth. “With occupancy cost tracking below 16% year-to-date (ytd), we think this could provide FCT with a good basis to negotiate for higher rents,” say the analysts.
According to them, organic growth is a near-term focus for the REIT as asset enhancement initiatives (AEIs) and tenant remixing are key to FCT’s value unlocking strategy.
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AEI works at Tampines 1 will run from 2Q2023 to 3Q2024 and will result in the deployment of an additional 8,000 sq ft of net lettable area on Basement 1 and Level 1, the higher-yield floors of the heartland mall. FCT expects the AEI to deliver a return on interest (ROI) of 8% and has already secured pre-commitments for 90% of the AEI space, mostly from new-to-mall tenants.
“While it expects some transitional vacancies due to the AEI, management aims to keep
dividends per unit (DPU) stable by increasing the amount of management fees paid in units,” say the CGS-CIMB analysts.
They add that FCT is also refreshing the tenant mix at Century Square and Changi City Point, and is in discussion with the other co-owners and asset manager on future AEI plans and remixing opportunities at NEX, in which it holds a 25.5% stake, which could help lift rents and valuation.
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Given FCT’s organic growth potential amid resilient demand for suburban retail space and improving tenant sales which could extend its positive rental reversions trend, they have maintained their FY2023 DPU forecast yield of 5.5%, which they believe is attractive at 0.9 standard deviations (s.d.) above the mean, and their target price of $2.62.
Additionally, Krishna Guha of Maybank notes FCT’s “proactive” asset and capital management. FCT’s gearing was 40.2% compared to 39.6% in 2QFY2023 due to a drawdown of
working capital loans, while all-in financing was 3.7% compared to 3.6% in the prior quarter, as FCT’s fixed rate hedge ratio fell from 76% to 63%.
Guha says that the REIT’s manager has already secured refinancing of loans due for renewal in FY2024 — equalling 17% of FCT’s overall debt — through a green loan offering with carbon credits from OCBC.
Along with FCT’s attractive valuation at a 5.5% yield and 0.9x price-to-book value ratio, the steady operation performance posted in 3QFY2023 and the REIT’s portfolio rejuvenation have kept the Maybank analyst on “buy” with an unchanged target price of $2.35.
Looking ahead, Darren Chan of Phillip Securities — who is also maintaining his “accumulate” call and target price of $2.35 — says improving tenant sales should lower occupancy costs further from the current levels of below 16%, which should support FCT’s ability to raise rents.
Meanwhile, inorganic growth opportunities such as the AEIs in FCT’s pipeline will coincide with tenant sales and shopper traffic that are continuing to grow and should bolster the REIT’s “stedt operating metrics”.
Chan’s catalysts for FCT include stronger-than-forecast rental reversions and accretive acquisitions, while risks for the REIT include a slowdown in retail sales.
Units in FCT closed 1 cent or 0.46% down at $2.18 on July 28.
