FrasersCT – DMG
Recession Times Calls For Resilient Dimes
FY08 DPU in line with estimates. Frasers Centrepoint Trust (FCT) posted an 11.3% YoY jump in FY08 DPU to 7.29¢, which hit our estimates and the Street’s. For the quarter, 4Q08 DPU headed up by 22.9% YoY to 2.05¢ (+9.3% QoQ), aided by a kicker of 0.46¢ from the release of S$2.9m in distributable income retained during the preceding three quarters. FY08 Gross Revenue gained 9.2% YoY to S$84.7m, accompanied by a similar 9.4% increase in NPI to S$56.6m, underpinned by positive rental reversions, improved turnover rents and rental boosters from AEIs. NAV was up 6.9% YoY to S$1.24, aided by S$51.6m of revaluation gains, with utilised cap rates estimated to be between 5.0 – 5.5%.
Northpoint 2’s injection put on hold. Despite Northpoint 2 attaining TOP just last Thursday, FCT has delayed its targeted injection date, which was slated to enter its portfolio somewhere between 4Q08 – 1Q09. Attributable factors for the delay include the difficulty in both debt/equity raising due to the ongoing credit squeeze, as well as higher expected funding costs (management cited spreads of 200 – 250 bps over SIBOR presently). Further, we understand that the possibility of yield accretion via an acquisition is not conceivable, judging from FCT’s high current implied yield of 11 – 12% against an estimated property yield of 6 – 6.5% for the asset. As such, we have removed Northpoint 2 from our forecasted numbers until further clarity on the injection date is provided, as such leading to a fall in FY09F DPU of 0.88¢. Injection plans for two other prospective assets – YewTee Mall and Bedok Mall – have also been delayed.
Organic boosters drive near-term growth. Looking ahead, FCT will have to bank on organic boosters in the shape of positive rental reversions (18.0% and 12.2% in NLA up for renewal in FY09 and FY10 respectively). This is on top of higher contribution from its 31%-owned Hektar REIT, as a result of a stipulated fall in withholding taxes (from 20% to 10%) paid by foreign institutional investors of Malaysian REITs. For FCT, we estimate a 12.5% increase in distribution income from associate, implying a quantum of S$4.7 – 4.8m for FY09 – FY10 (previously S$4.2 – 4.3m).
Maintain BUY at lower fair value of S$0.86. Given the current macroeconomic concerns and weak investor sentiments plaguing property-related counters, we have taken on a more conservative stance. For FY09F and FY10F, we are assuming portfolio-wide occupancy levels of 96% (previously 99 – 100%), and pegging rental reversion rates (previously 5 – 10%) to a bear-case forecasted GDP growth rate of -1% and 2% respectively. As such, FY09F and FY10F DPU falls 4.6 – 7.4% to 7.0¢ and 7.2¢ respectively. However, we continue to believe in the resilient business model of pureplay heartlander-driven suburban rental malls, where people will still have to shop for non-discretionary items and rents being less volatile during periods of economic slowdown. FCT’s investment case is further strengthened by a dearth of new supply of retail malls within the close vicinity of its malls, as well as it trading at a lower beta than most other strong sponsor-backed REIT, thus limiting volatility. At 28.1%, FCT is also one of the lower-geared S-REITs, with its next major chunk of loan only due in 2011. At current levels, the stock is trading at FY09F – FY10F yields of 10.9 – 11.3%. Maintain BUY at lower fair value of S$0.86. Key risks include more macroeconomic dampeners and prolonged credit crunch.