FrasersCT – OCBC

Oversold on perception of high valuation

Market pricing in higher risk premium. Frasers Centrepoint Trust (FCT), like all the other S-REITs, has been sold down severely since early July. Trading yields have expanded by 50bp to 170bp. However, FCT appeared to have been more severely affected. Over the period of early July to late August, the retail REIT sector has lost about 11% of its value; FCT was the poorest performer, losing about 18% of its value; the next poor performer was CapitaMall Trust (CMT) which lost about 14%. We believe the market was punishing REITs with high price to book ratio as the risks of disappointment by these high-growth REITs are now much higher in the current uncertain market.

Price to book is key. Prior to the US sub-prime woes, FCT’s P/B ratio was 1.6x (11th July) and was among the highest within the retail REIT sector, and was second only to CMT (P/B >2.3x). The sector average P/B ratio then was about 1.5x, so it was natural for the market to sell FCT down. However unlike all the other retail REITs, FCT did not revalue its book in its last results. All the other retail REITs performed a revaluation and recognized gains of S$112m to over S$610m, resulting in gains in their respective portfolio of 6.3% to 19%. In other words, FCT’s book is understated and hence its price to book ratio was overstated.

We estimate that if FCT were to revalue its assets, it could achieve a revaluation surplus of at least 17%. This in turn could boost its book value to S$1.28 (from S$1.09), or lower its price to book to only 1.14x, well below the current sector average of 1.28x. Hence we see the sell down of FCT as unjustified.

Upgrade to BUY. The investment case for FCT is simple; pipeline of properties from parent, growth from asset enhancement and finally acquisition in Malaysia. The key issue has been valuation and that has been the reason for our HOLD rating since April 07. However in light of the recent sell-down and the fact that we believe FCT is likely to see a meaningful rise in its book value, we thus upgrade our recommendation from HOLD to BUY while keeping our fair value at S$1.67.