FrasersCT – UOBKH

Rental Reversion Higher Than Expected

Strong rental reversion at Causeway Point. Frasers Centrepoint Trust (FCT) reported strong rental reversion for Causeway Point in its 2QFY08 results. Revenue contribution from its largest mall Causeway Point gained 11% yoy to S$14.6m, benefitting from strong rental reversion and higher turnover rent. 20,816sf of retail space at Causeway Point representing 5% of total net lettable area (NLA) was renewed at 16% above preceding rental rates in 2QFY08. FCT has also increased the number of leases with turnover rents from 16% in 2QFY07 to 62% in 2QFY08. Stronger performance at Causeway Point has offset lower occupancy at Northpoint due to ongoing asset enhancement initiative (AEI), helping FCT generate 10.3% yoy increase in revenue to S$21.6m and a 16.8% yoy increase in distributable income to S$12m in 2QFY08.

Ready pipeline of acquisitions. FCT has a ready pipeline of acquisitions that will double NLA to more than 1.2m sf when fully completed. It has entered into a put and call option agreement with sponsor Frasers Centrepoint Limited for the purchase of Northpoint 2 at between S$139.5m and S$170.5m. Northpoint 2 is 70% completed and is expected to obtain a temporary occupation permit by Aug 08. 68% of the NLA has been committed and Northpoint 2 is on schedule to be injected into FCT in 1QFY09. We expect YewTee Point and Bedok Mall with NLA of 80,000sf each to be injected in 3QFY09 and 2QFY11 respectively. We estimate the three new malls to contribute 28.6% of total revenue in FY12.

Upgrade to BUY. FCT focuses on suburban retail malls, which provide defensive qualities. We have raised our FY08 DPU forecast by 15% to 7.7 cents to factor in strong rental reversion from Causeway Point. FCT provides FY08 distribution yield of 6.4%. Our target price for FCT is S$1.66 based on the two-stage dividend discount model. We have upgraded our recommendation from HOLD to BUY as our new target price provides upside of 37.2%.