FrasersCT

Fundamental call still stands

Strong sponsor. We believe perceived risk will drive REIT performance in 2009. Sponsored REITs like Frasers Centrepoint Trust (FCT) are generally thought to have a lower risk profile as the sponsor is seen as a bastion of support for the S-REIT – especially financial support. FCT has a strong sponsor whose recent show of tangible financial support for newly affiliated Frasers Commercial Trust speaks volumes. FCT is geared at 28.1%, with 80% of its outstanding debt expiring only in July 2011. Our main balance sheet related concern is the financing of ongoing capital expenditure – FCT is currently using uncommitted drawn banking facilities for this purpose. The likely strength of lending relationships inherited from its sponsor alleviates our concern (somewhat).

Refining assumptions. 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. However, we are refining our assumptions. We had previously assumed flat YoY reversionary growth in rentals. We are now pricing in a 5-7% decline per annum over the next two years (except for an expected uplift at Northpoint next year post-asset enhancements). This is in line with our assumptions for rental contractions at Suntec City Mall (est. 8-10% pa decline) and CapitaMall Trust (est. 5% pa). We have also refined our estimate for the value of FCT’s stake in Malaysian Hektar REIT.

Fundamental call still stands. FCT’s share price has continued to fall in tandem with the S-REIT sector. It is currently trading at a 53% discount to book value. However, we believe our fundamental call still makes sense. In our opinion, FCT’s current portfolio lacks critical mass. FCT was in the process of building a scale portfolio on the back of a clearly defined sponsor pipeline. Unfortunately, even the best laid plans can go awry. FCT has now postponed its expansion plans indefinitely, citing credit market conditions. We believe that the pace of acquisitions will dramatically slow across the S-REIT sector because of the rising cost of capital, overstretched balance sheets, and limited access to capital. While slowing growth is a sectorwide problem, its importance to FCT is above average (in our opinion). Maintain HOLD. Based on the adjustments described above, our fair value estimate drops from S$0.72 to S$0.62.