FrasersCT – OCBC

Good 4Q results despite works at Northpoint

Good 4Q results despite asset works. Frasers Centrepoint Trust (FCT) announced a 6% QoQ gain and a 11% YoY gain in 4Q08 revenue to S$22.1m. Gross revenue rose despite asset enhancement works at Northpoint, where revenue fell 25% YoY to S$4.3m. The results were better than our expectations due to a strong revenue showing from Causeway Point. FCT was able to distribute S$12.8m for the quarter, up 10% QoQ and 24% YoY, thanks to the inclusion of S$2.9m retained from prior quarters. Unitholders will enjoy 2.05 S cents per share.

Solid defensive position. We continue to like FCT’s suburban assets and their mass-market consumer focus. The malls are strategically located adjacent to MRT stations and bus interchanges, and enjoy captive markets with strong population catchments and limited alternative shopping choices. The primary focus is on non-discretionary spending and both Northpoint and Causeway Point have had a good track record in previous crises. FCT is geared at 28.1%, with 80% of its outstanding debt expiring only in July 2011. We also like that FCT will see only 23% of its leases (in terms of gross rental income) expire over FY09 and FY10. Asset enhancement works are going on track in Northpoint, and the manager is guiding that average rents will increase 20% post-works.

Portfolio expansion on hold. FCT was in the process of building a scale portfolio on the back of a clearly defined sponsor pipeline. In our last report, we highlighted the lack of clarity on the execution of these plans – the timing, pricing, financing and consequently, accretion. Moody’s cited a similar execution focus when it announced earlier this week that its A3 rating on the trust was under review. Our concerns were justified – FCT announced that it is now indefinitely postponing its expansion plans in view of credit market conditions. In our view, any actualization of the pipeline would have to be supported by a fresh equity issue.

Since our last report two months ago, FCT’s share price has fallen 47% and it is trading at a 10.7% FY09F (vs SREIT avg 16%) yield. This is however an overall S-REIT phenomenon – the FSTE ST REIT index has declined 42% over the same period. We continue to find the pricing expensive relative to FCT’s peers. Mindful of the current economic environment, we increase our cap rate assumptions by 50 basis points and have refined our discount rate, rental growth and occupancy assumptions. We adjust our fair value estimate down from S$1.20 to S$0.72. Maintain HOLD.