Analysts are mostly remaining positive on Frasers Centrepoint Trust J69U (FCT) after the REIT reported a distribution per unit (DPU) of 6.02 cents for the 2HFY2023 ended Sept 30 and a DPU of 12.15 cents for the FY2023.
CGS-CIMB Research, DBS Group Research, Maybank Securities and OCBC Investment Research (OIR) have kept their “add” and “buy” calls while PhillipCapital has kept its “accumulate” call. RHB Bank Singapore has kept its “neutral” call.
Save for DBS, which has kept its target price unchanged at $2.60, the rest of the brokerages have lowered their target prices. CGS-CIMB has lowered its target price to $2.52 from $2.62, Maybank has lowered its target price to $2.25 from $2.35 while OIR has lowered its target price to $2.35 from $2.41.
PhillipCapital has lowered its target price to $2.29 from $2.35 while RHB’s target price was down to $2.12 from $2.15.
“FCT continues to pull the right levers of growth organically with record-high occupancy of 99.7% across 10 retail shopping malls with strong reversionary growth of 5% in rentals,” explain the DBS analysts, Geraldine Wong and Derek Tan.
Furthermore, the analysts believe that FCT’s manager’s track record in portfolio rejuvenation in recent years will help ensure the resiliency of the REIT’s portfolio for medium-term sustainability.
See also: Frasers Centrepoint Trust reports FY2023 DPU of 12.15 cents, 0.6% lower y-o-y
Moreover, FCT’s portfolio, which saw tenant sales at around 15% above its pre-Covid-19 levels, continues to outperform its peers on several fronts. The REIT’s occupancy cost, which stood at 15.6% for FY2023, below its pre-Covid-19 levels of 16.6% to 17.0%, means there is scope for further rental upside. There is also more room for reversionary rents to rise, backed by healthy tenant sales, note DBS’s Wong and Tan.
Looking ahead, the analysts see the possibility of FCT adding its stake in Nex mall in the coming FY.
“FCT’s valuation sets a precursor for the year-end revaluations of other retail Singapore REITs (S-REITs), while we expect stable cap rates for Singapore retail valuations and, correspondingly, some support for gearing levels,” write the analysts from DBS.
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While the analysts’ target price remains unchanged, they have tweaked their interest rate assumptions to a more “conservative” 4.25% average interest cost for FY2024/FY2025 from 4% previously.
“The divestment of its Changi City Point (November 2023) and Hektar REIT stakes (December 2023) has been accounted for in our numbers, accompanied by the debt repayment of $375 million for interest cost savings,” say Wong and Tan. “Reversions are pegged to an inflation-hedged range of 3.0% - 5.0% as positive traction continues y-o-y into FY2024.”
Following the completion of the divestment of Changi City Point and stakes in Hektar REIT, FCT’s gearing will be lowered to a “comfortable” 36.1%.
“While proceeds from the sale of Changi City Point ($338 million) and Hektar REIT ($39 million) will likely be used to pay off debt in the interim, which is likely to be the best use of the proceeds for now to deleverage and lower exposure to interest rates, the additional headroom provides FCT with greater flexibility to make acquisitions in the medium term, when the interest rate environment stabilises. At an implied cap rate of 4.9% for Nex, the redeployment into Nex can be done in a way that is accretive to value,” they write.
In their Oct 26 report, the analysts have lowered their DPU estimates marginally to 11.9 cents and 12.2 cents in the FY2024 and FY2025 respectively to account for a forward yield of 5.6% and 5.8% in their new estimates.
FCT ‘top pick’ for CGS-CIMB
CGS-CIMB analysts Natalie Ong and Lock Mun Yee have named FCT as their “top pick” within the retail sector S-REITs as they like the resilience and demand for space at the REIT’s suburban malls
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In their report dated Oct 26, the analysts note that the REIT’s full-year DPU stood in line with their expectations at 99.9% of their estimates. Furthermore, they liked that the REIT logged positive rent reversions, higher turnover rents, as well as recorded a stable balance sheet for the year ended Sept 30.
“In the FY2023 briefing with analysts, management said it will continue to focus on increasing gross turnover rents by rejigging the tenant mix towards tenants with higher sales, and pushing for higher base rents,” write Ong and Lock. “We think positive reversions, higher gross turnover rents from improved tenant sales and contributions from the completed asset enhancement initiative (AEI) at Tampines 1 will drive FY2024 revenue growth.”
“However, management guided that higher electricity, water and manpower costs could result in slight NPI margin compression in FY2024. FCT locked in electricity costs for FY2024 at slightly higher rates y-o-y – management expects utility costs as a percentage of electricity costs to increase from 10% in FY2023 to 11% in FY2024,” they add.
Despite the positive outlook, the analysts have lowered their earnings per share (EPS) estimates for the FY2024 and FY2025 to reflect the divestment of Changi City Point and Hektar REIT units. They have also lowered their DPU estimates for the FY2024 and FY2025 by 3.0% and 3.4% on higher operating expenses (opex) and cost of debt assumptions.
Funding costs bite amid stable results: Maybank
Maybank’s Krishna Guha has also lowered his DPU estimates for the REIT by 1% to 2% in addition to his lowered target price. The lower DPU estimates factored in slower retail sales and rising borrowing costs while the reduced target price came on the back of a higher discount rate.
The analyst has also forecasted a compound annual growth rate (CAGR) of 2% for FY2022 to FY2024 led by growth in passing rents, higher ancillary income and service charges. That said, he expects borrowing costs to rise from 2.2% to 3.8% by 2025.
“[FCT’s] full year DPU of 12.15 cents slipped 0.6% y-o-y, in line with our estimate of 12.16 cents,” says Guha.
“Topline growth was driven by higher occupancy, positive reversions and higher ancillary income. This was partly offset by higher expenses and lower contribution from assets under AEI. Funding cost inched up. Cap rates were stable and asset values rose for prime suburban malls. Management is focussed on strategic portfolio reconstitution while managing costs,” he adds.
Higher-for-longer interest rate environment may pressure DPUs: OCBC
The research team at OIR note that FCT’s FY2023 results came in with its expectations, which reflected its resilient operations.
“The only blemish [came from] the slight decline in its DPU,” the team adds. The decline in FCT’s FY2023 DPU was due to the jump in borrowing costs. To this end, the OIR team sees that the higher-for-longer interest rate environment may pressure FCT’s DPUs.
That said, it remains positive on the REIT, noting that FCT had previously established a strong track record of delivering positive DPU growth every year since its listing in July 2006 to FY2019 with the exception of FY2020 due to the Covid-19 pandemic. FCT’s FY2021 results saw a “firm rebound” y-o-y while growth continue in FY2022.
“Operationally, we believe FCT’s relatively more defensive and resilient portfolio of suburban malls in Singapore would position it favourably amid an uncertain macroeconomic landscape, given their dominant positions in their respective catchment areas. Management’s astute divestments has also alleviated the strain on its balance sheet, and it is now better positioned to pursue inorganic growth opportunities,” writes the OIR team.
The team has lowered its DPU forecasts for the FY2024 and FY2025 by 0.4% and 1.2% respectively as they factor in FCT’s proposed divestments and full-year results in its model.
“Given the increased market volatility, we also increase our cost of equity assumption from 6.2% to 6.4%,” they add.
PhillipCapital expects to see positive rental reversions in FY2024
PhillipCapital’s Darren Chan likes FCT’s “nearly full” occupancy at 99.7% as at Sept 30. The REIT’s continued growth in tenants’ sales and shopper traffic, higher portfolio valuation as well as a lack of refinancing risks in FY2024 are all positives.
However, higher operating costs were a concern to Chan, who notes that this is likely to eat into FCT’s net property income (NPI) margins in FY2024. The analyst expects FCT’s NPI margins to drop from 71.8% in FY2023 to 70.6% in FY2024.
“FCT has done well on the transactions, with five different transactions announced in FY2023 with a total value of $1.1 billion. The most recent were the divestments of Changi City Point and FCT’s interest in Hektar REIT (expected to be completed by the end of this year), with the divestment proceeds planned to repay debt with the highest interest cost,” Chan writes in his Oct 27 report.
“Going forward, further inorganic growth opportunities include the acquisition of the sponsor’s pipeline of assets such as the 24.5% effective interest in Nex and Northpoint City South Wing. The first batch of AEI units at Tampines 1 is expected to be completed in November 2023, with tenants beginning operations from December 2023,” he adds. “The mall continues to operate as works are staged and more than 94% of AEI spaces have been pre-committed to date. The full completion of Tampines 1 AEI is expected in 4Q2024.”
However, Chan has lowered his DPU forecasts for the FY2024 and FY2025 both by 5% as he rolls his forecasts forward.
“We expect positive rental reversions to remain intact for FY2024e, supported by the low occupancy cost of 15.6% and tenants’ sales growth. The current share price implies a FY2024 DPU yield of 5.9%,” he says.
FCT a ‘defensive safe haven’: RHB
Unlike his peers, RHB’s Vijay Natarajan remained on the fence on FCT, with the REIT’s FY2023 results coming in below his expectations.
On the one hand, the analyst likes that retail market conditions are reflecting a healthy improvement from steady income growth and tourist arrivals, which came across FCT’s operational performances across its malls.
The recent divestment moves are a plus in his book, as well. That said, higher interest and operational cost pressures will continue to weigh on earnings, he says.
“FCT remains a defensive safe haven but current yield spreads are not attractive,” he writes.
Like his counterparts, Natarajan has also lowered his DPU estimates for the FY2024 to FY2026 by 1% to 3% by fine-tuning interest costs and NPI margins.
“FCT’s environmental, social and governance (ESG) score of 3.2 (out of 4.0) is two notches above the country median, resulting in a 4% ESG premium to our dividend discount model (DDM)-derived intrinsic value – which we applied to derive our target price,” he says.
Investors may accumulate positions in FCT, says Moomoo
Moomoo Singapore’s equity dealer, Too Juncheong, believes that investors who have confidence in FCT may look to accumulate their positions in the REIT during this higher-for-longer interest rate environment with its current dividend yield of nearly 6%. Such investors can then await for the eventual rate cuts, Too adds in his unrated report.
“FCT is the largest suburban retail mall owner in Singapore, and its presence is undeniable for most Singaporeans… Investors who are looking for opportunities in FCT can physically head down to any of the nine retail malls owned by FCT, to have a feel and sense of the occupancy and activity within the malls, something not as accessible for investors looking at overseas REITs,” he writes.
Should investors prefer to analyse the stock technically, FCT recently fell below most of its important support levels.
“On fib retracement levels, key areas where the stock support levels are left on a common ratio of 38.2% and 23.6%, which are at 2.01 and 1.95, respectively,” says Too.
“The downtrend momentum is extraordinary, and investors should be cautious. Any loss on the aforementioned support levels will indicate that the stock may need to make further adjustments,” he adds.
Units in FCT closed 2 cents higher or 0.98% up at $2.06 on Oct 30.
