RHB Group Research analyst Vijay Natarajan has kept a “neutral” rating on Frasers Centrepoint Trust (FCT) with a target price of $2.45.
In his report dated July 1, Natarajan observes that FCT’s suburban malls have been performing steadily year-to-date (ytd) for the FY2022 ending September, with ytd-April portfolio tenant sales at 9%, which is at above pre-Covid-19 levels.
“Looking ahead, we believe the key challenges for the retail sector are rising inflation curbing discretionary spending, increasing cost pressures from manpower and utility costs on retail tenants, and higher GST charges kicking in,” says Natarajan.
The analyst sees a good possibility of FCT, teaming along with its sponsor to acquire four suburban retail assets from Mercatus Co-operative, a unit of NTUC Enterprise Co-operative, currently in the market with a pricing expectation of over $4 billion.
“Mercatus’ four suburban malls – Jurong Point, AMK Hub, Nex, and Thomson Plaza – in our view presents a good strategic fit to FCT’s portfolio and could further boost the REITs standing as a dominant suburban mall player in Singapore,” says Natarajan.
FCT’s low gearing of 33% also presents a good debt headroom of over $1 billion, says the analysts, and he also sees the possibility of FCT divesting Central Plaza, which is the sole office asset in its portfolio.
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Other possible acquisition candidates are Waterway Point (balance 60% stake) and North Point City South wing from its sponsor, as they are minimally impacted by rising utility charges and rising rates.
The impact of rising utility charges on FCT’s portfolio is minimal compared to its peers as the utility prices are fully hedged for the rest of the year (except for one), observes Natarajan. “Utility hedges for most of the malls will be expiring in May next year,” he adds.
With utility charges only accounting for 7% of its operating expenses (opex), the analyst believes FCT is in a better position to weather rising utility rates. On the debt front, approximately 70% of it is currently hedged, with every 50 basis points (bps) rise in interest rates having a -1.3% impact on its distribution per unit (DPU).
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While tenant sales and occupancy levels are trending in the right direction, some challenges lie ahead, observes Natarajan. “Overall tenant sales at the malls have been exceeding pre-Covid-19 levels since the start of the year though performance across the various segments remain uneven,” he says.
“[FCT’s] portfolio occupancy rose 0.6 percentage points q-o-q to 97.8%, with all of its malls showing improved or steady occupancy q-o-q”, continues the analyst. “1H rent reversion was also slightly better at +1.7% (outgoing vs incoming basis) and +4% (average basis),” he adds.
“Looking ahead, the key challenges are rising inflationary pressures, manpower constraints, and GST impact, which could potentially offset the reopening impact on retailers, in our view,” the analyst writes.
As at 11.13am, units in FCT are trading at 1 cent down or 44 cents lower at $2.28 at an FY2022 P/B ratio of 0.99x and dividend yield of 5.6%.
