Resilient in a downturn

• Full year in line. 4Q08 results were in line with Street and our expectations. DPU of 2.05cts forms 29% of our full-year forecast of 7.08cts. Full-year DPU of 7.29cts forms 103% of our estimate. Gross revenue of S$22.1m for the quarter was up 11.4% yoy, driven by a strong performance from Causeway Point and the newly refurbished Anchorpoint. Full-year gross revenue of S$84.7m was up 9.2% yoy. Growth in distributable profit was stronger than gross revenue on a yoy basis at 11.3% boosted by Hektar REIT’s contributions.

• AEI and acquisition updates. AEI initiatives for Northpoint were on track with full completion by Jun 09, management said. Pre-commitments are high at about 90%. Projected average monthly rents after the AEI is S$13.20psf, up 20% from S$11.00psf before. However, due to the current credit crunch and the fact that physical asset yields are presently lower than FCT’s trading yields and are thus not likely to be DPU-accretive, planned injections of Northpoint 2, Yew Tee Mall and Bedok Mall into FCT will be delayed.

• Healthy finances. Balance sheet was defensive with no significant debt due for refinancing until 2011. Current asset leverage is low at 28.1%.

• Changes to assumptions. We remove our earlier forecast of acquisitions for Northpoint 2, Yew Tee Mall and Bedok Mall, while maintaining our forecast of near full occupancy for FCT as there is no known upcoming supply in the vicinity of FCT’s major malls, Causeway Point and Northpoint. Separately, we increase our associate contributions on strong FY08 performances.

• Maintain Outperform; lower target price of S$1.13 (from S$1.49). Following our adjustments, our DPU estimates for FY09-10 decrease by 4-6%. Accordingly, our DDM-derived target price (new discount rate of 9.7% from 8.5%) drops to S$1.13 from S$1.49. We also introduce FY11 estimates. We remain confident that FCT’s rents will stay resilient in an economic downturn, backed by limited supply and tenants catering to non-discretionary spending.

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.

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.