FrasersCT – UOBKH
Defensive strength from suburban malls
Growth from Causeway Point and Anchorpoint in 4QFY08. Revenue contribution from Causeway Point increased 7% yoy to S$13.8m in 3QFY08 and accounted for 66.3% of total revenue. 6,708sf or 1.6% of net lettable area (NLA) at Causeway Point was renewed in 3QFY08 at 17.3% above preceding rental rates. Revenue contribution from Anchorpoint more than tripled to S$1.7m after a 40% increase in rents and recovery to full occupancy after completion of asset enhancement initiative. Overall occupancy was 95.7% in 3QFY08 compared to 92.9% last year. This is despite lower occupancy of 82.9% at Jun 08 for Northpoint due to asset enhancement works. Distributable income increased 19.1% yoy to S$12.2m. FCT declared DPU of 1.88 cents for 3QFY08, up 12.6% yoy, and will be paid on 29 Aug 08.
Cushion from income retained. FCT has retained DPU of 0.18 cents in 1QFY08, 0.19 cents in 2QFY08 and 0.1 cents in 3QFY08, a total of 0.47 cents. FCT is committed to distributing 100% of distributable income and the retained income will be distributed in 4QFY08. This will mitigate negative impact from asset enhancement works at Northpoint, which will affect higher yielding space at Level 1 to level 4 in 4QFY08. The upgrade is scheduled for completion in Jun 09. Management expects average rent for Northpoint to increase 17.4% to S$12.91psf pm after the asset enhancement initiative is completed.
Northpoint 2: on track for injection by Mar 09. Construction for Northpoint 2 is on schedule to obtain temporary occupation permit (TOP) by Aug 08. 96% of NLA is already committed or in advance stage of negotiation. FCT 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 to S$170.5m. The mall is targeted for injection into FCT in 1HFY09 (by Mar 09).
FCT has a ready pipeline of acquisitions that will double total NLA to more than 1.2m sf when fully completed. Besides Northpoint 2, we expect YewTee Point and Bedok Mall with NLA of 80,000sf each to be injected in 3QFY09 and 2QFY11 respectively. We estimate that the three new malls will contribute 29% of total revenue in FY12.
No refinancing risk. FCT has a conservative level of gearing at 29.5%. There is no requirement for refinancing till Jul 2011 when term loan of S$260m matures. Moody’s Investor Service has provided corporate rating of A3.
Maintain BUY. FCT focuses on suburban retail malls located in the HDB heartland, which provides defensive qualities. It provides distribution yield of 6.2% for FY08 and 6.7% for FY09, an attractive spread of 2.8% and 3.3% over 10-year Singapore government bond yield of 3.4%. Our target price for FCT is S$1.55 based on dividend discount model (required rate of return: 8.5%, terminal growth: 2.8%).