FrasersCT – DMG

Flat Is The New Up

Modest 1Q09 performance. Frasers Centrepoint Trust (FCT) recorded a 3.7% YoY improvement (-18.3% QoQ) in 1Q09 DPU to 1.67¢, which accounted for 24% of our FY09 estimates (in line) and 22% of the Street’s (slightly below). Operating-wise, topline inched lower by 3.2% YoY (-11.8% QoQ) to S$19.5m, attributable to ongoing AEIs at Northpoint. NPI was down by a wider margin (- 8.0% YoY, -9.0% QoQ) to S$12.8m, due to higher property taxes and other property operating expenses.

Flat (reversions) is the new up. With 90% of FY09 gross rental income already locked in, we reckon earnings should be rather stable for the remaining three quarters of FY09. Any possible growth in FY10 DPU should herald from a full year contribution from the post-AEI Northpoint (annual incremental NPI of S$4.1m, completion in end-Jun 09). Occupancy rate should also then revert to > 90% (88.7% currently), from our view. For FY09F and FY10F, we have tweaked our occupancy levels to 95% (96% previously). Flat (-1% to 2% previously) rental reversion rates have been assumed for the 16.6% and 12.1% in NLA which are up for renewal in FY09 and FY10 respectively. FY09F and FY10F DPU thus slip by 1.5 – 1.8% to 6.9¢ and 7.1¢ respectively.

Maintain BUY at lower fair value of S$0.82. As FCT enters the third major economic downcycle, we cannot stress enough the unfailing resilience of Causeway Point and Northpoint (90 – 95% of topline and NPI), as exhibited by their > 95% occupancy and minimal loss of rental income during the previous two crises. This is not unjustifiable given that their suburban malls target mainly the consumers who shop for non-discretionary items regardless of the general economic performance. Further, we believe supply-side competitive pressures from upcoming malls are insignificant, as there is still a paucity of new malls within the close vicinity of FCT’s properties, aside from the surrounding small mom and pop neighbourhood shops. We also welcome FCT’s move to pass on the 40% property tax rebates within the recent Budget 09 to tenants. At 28.5%, FCT remains one of the lower-geared S-REITs, with its next major loan only due in 2H11. At current levels, the stock is trading at FY09F – FY10F yields of ~ 10%. Maintain BUY at lower fair value of S$0.82 (S$0.86 previously). Key risks include more macroeconomic dampeners and prolonged credit crunch.