Frasers Centrepoint Trust J69U
Price targets:
RHB Bank Singapore ‘neutral’ $2.13
DBS Group Research ‘buy’ $2.60
Maybank Securities ‘buy’ $2.35
Citi Research ‘buy’ $2.51
Changi City Point divestment is a positive
Analysts are optimistic about Frasers Centrepoint Trust’s (FCT) decision to divest Changi City Point. On Aug 30, FCT announced that it would divest the mall to a foreign buyer with a real estate presence in Singapore. The mall was divested at a cash consideration of $338 million. The proceeds will then go towards repaying the REIT’s loans and reducing its aggregate leverage. The REIT’s average cost of borrowings and hedge ratio of fixed-rate loans will also be improved on a pro forma basis.
Citi Research analyst Brandon Lee has upgraded his call on FCT to “buy” given its improved gearing to 37.1%, making the REIT the lowest-geared retail Singapore REIT (S-REIT) among the REITs within his coverage.
Lee adds that FCT’s move will also give it sufficient debt headroom to make potential acquisitions that are accretive to its distribution per unit (DPU).
The recovery of retail revenue after the pandemic is another plus for FCT in the analyst’s book. With all that in mind, Lee has increased his target price to $2.51 from $2.30. His new target price has an implied P/B of 1.08x. This is in line with FCT’s five-year pre-pandemic mean of 1.09x.
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Lee has also raised his DPU estimates for FY2023, FY2024 and FY2025 by 1.7%, 0.7% and 1.1%, respectively, on the revised debt cost and lower debt from the sale proceeds of Changi City Point.
Maybank Securities analyst Krishna Guha is positive on the deal as the REIT’s portfolio attributes and debt metrics will improve after the divestment. “The mall has been underperforming within the portfolio. Historical occupancy and net property income (NPI) yield have been at or below average. It lacks a residential catchment and does not fit, in our view, with FCT’s strategy of focusing on prime suburban retail malls,” he writes.
“Debt repayment improves financial flexibility. As such, the divestment puts FCT in a stronger position to execute the ongoing portfolio reconstitution strategy,” adds Guha, who has kept his “buy” call with an unchanged target price of $2.35.
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DBS Group Research analysts Geraldine Wong and Derek Tan have kept their “buy” call on FCT with an unchanged target price of $2.60. Like Maybank’s Guha, Wong and Tan like how the sale has given FCT an attractive exit yield of 4.3% considering the shorter land lease tenure of the mall at 46 years.
The sale also serves as an opportunity to “crystallise” net asset value (NAV) for the REIT due to the mall’s low land lease. “The land lease tenure of the mall is the oldest within the portfolio — at 46 years — and will start to see a faster rate of valuation decay in the medium term,” the analysts explain.
Referring to Bala’s curve as a guide on valuation implications along a decline in leasehold value, the analysts note that a comparison between Changi City Point and another one of FCT’s assets, Nex, will value both malls at around 70% and 89% of a fresh 99-year leasehold basis based on Changi City Point’s 46-year leasehold tenure and Nex’s 85-year leasehold tenure.
The analysts have adjusted their NPI yields across selected FCT properties on a 99-year leasehold basis “for a fairer comparison to obtain an implied valuation cap of 3.6% for Changi City Point, even tighter than valuer cap rates for retail assets at 4.25%–4.50% for dominant malls.”
With the improved financial flexibility after the divestment, the analysts at DBS see the possibility of FCT acquiring its sponsor’s remaining 25.5% effective stake in the joint venture owning Nex. Should the REIT be able to redeploy its debt capacity into Nex at an initial yield of 4.8% to 4.9%, that will mean an immediate accretion to its DPU compared to its exit cap on Changi City Point at 4.31%.
“Moreover, the need for equity fundraising to fund the acquisition without overstretching its balance sheet is an overhang removed, in our view,” the analysts write, adding that the purchase of its remaining sponsor’s stake in Nex will require $350 million, which can be fulfilled from the divestment quantum of Changi City Point.
“From a portfolio perspective, this upcycling will be a premium to FCT’s overall portfolio strategy on all aspects, including a longer lease tenure for Nex at 85 years, expansion of presence within the north and northeast region of Singapore where retail space per capita is the lowest islandwide, dominant attributes at Nex mall with excellent mall connectivity to an MRT interchange station, and DPU accretion to a higher yielding asset at high 4%,” the analysts add.
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“FCT’s share price has held up well against its peers [at] –1% ytd with more room to rally given that [the] equity fundraising overhang on [its] share price has been substantially lifted for now,” they continue.
RHB Bank Singapore analyst Vijay Natarajan has kept his “neutral” call with a higher target price of $2.13 from $2.10 previously. “The proposed Changi City Point divestment is a positive move and one we believe addresses gearing concerns and ballooning interest cost pressures,” he says.
The analyst also expects the divestment to have a “mild positive effect” on DPU as the proceeds will help to repay FCT’s high-interest floating rate loans.
“With lower gearing, FCT may now look more keenly at adding stakes in some of its newer high-quality malls — such as Waterway Point and NEX — that should help consolidate its dominant suburban retail position,” he adds. — Felicia Tan
Japan Foods 5OI
Price target:
RHB Bank Singapore 45 'buy' cents
Weighed down by cost pressures
RHB Bank Singapore’s Shekhar Jaiswal has kept his “buy” call on Japan Foods as he expects the company to register strong sales growth thanks to the expansion of its halal restaurant brands.
In the 1QFY2024 ended June, Japan Foods reported a net addition of two restaurants in its halal segment, which saw “strong customer demand and growth in revenue contribution”.
“Since the first halal concept restaurant opened in November 2020, it has rapidly expanded this segment to 29 halal concept restaurants under various brands as of June 30,” the analyst writes.
“In July 2023, the company launched a self-developed new brand, Godaime, specialising in maze soba or dry ramen. It also launched Tori Sanwa, a 120-year-old brand serving Nagoya chicken rice bowls in August,” he adds.
Jaiswal has previously lowered his target price to 45 cents from 65 cents with the company’s lower-than-expected earnings for 1QFY2024.
“While 1QFY2024 gross profit was in line, net profit significantly missed estimates due to higher-than-expected selling and distribution (S&D) expenses,” the analyst writes. Although these expenses are expected to decline over the FY2024 amid slowing economic growth and moderating inflation, they are still likely to increase during the fiscal year, he adds.
Jaiswal has also lowered his profit estimates for FY2024 to FY2026 by 37% to 50% to account for the higher operating costs.
Overall, the analyst remains positive on Japan Foods as he expects the company to maintain a dividend payout ratio of close to 100% during his forecast period. The ratio implies a dividend yield of 5% at Japan Foods’ current share price. — Felicia Tan
Uni-Asia Group CHJ
Price target:
SAC Capital ‘buy’ $1.14
Big discount to book value
Lower shipping charter rates and a weak property market in Hong Kong are causing an overhang over the Uni-Asia Group.
However, with the share price of the investment firm hovering at a wide discount to its peers and an even wider gap to its book value, SAC Capital analysts Nicole Lim and Matthias Chan are upbeat that there is more upside to the share price.
As at June 30, Uni-Asia’s NAV was US$1.89 ($2.57), implying a price-to-book ratio of just 0.36x, versus a sector average of 0.92x. The 60% discount, say Lim and Chan in their Aug 30 note, is “too wide” considering the “high quality of its real assets recorded at values significantly below those of the market.”
According to the analysts, charter rates will likely remain weak in the current 2HFY2023 ending December. This follows a 74% y-o-y drop in 1HFY2023 earnings to US$4.3 million as average charter rates in 2QFY2023 fell 13% to US$10,800 per day over 1QFY2023.
Uni-Asia’s management is guiding for a blended spot rate of US$10,000 to US$15,000 for 2HFY2023 before recovering in FY2024 led by higher external demand. As such, Lim and Chan have cut their FY2023 and FY2024 earnings estimates to US$8.3 million and US$11.3 million. However, the analysts point out that Uni-Asia can sell some ships to pare debt. The price in May for a 38,000–40,000 deadweight tonnage (dwt) new build price stands at US$30 million, almost on par with a five-year-old 38,000 dwt price of U$26 million. “Purchase of second-hand vessels remains an attractive option,” write Lim and Chan.
Uni-Asia has taken minority stakes in small commercial developments in Hong Kong. However, the city is suffering spillover from the broader slowdown in China. On the other hand, Uni-Asia sees further expansion in Japan. The analysts note that after its first successful co-purchase of land outside Tokyo, it is mulling similar acquisitions in Furano and Niseko.
“We maintain a buy recommendation at a revised target price of $1.14, down from $1.20 previously,” note Lim and Chan, who have inputted a valuation of 0.45x book, using a smaller discount of 50%. — The Edge Singapore
