FCT – UOBKH

Anchored To Resilience In The Heartlands

Dichotomy in the retail market. Suburban malls are resilient and hardly affected by the financial crisis due to a change in behaviour with consumers visibly trading down to stretch every dollar. On the other hand, shopping malls along Orchard Road suffer from a triple whammy, namely: a) local consumers tightening their belts and doing more shopping at suburban malls, b) tourist arrivals falling due to the outbreak of influenza A (H1N1) and c) intense competition with 1,384,000sf of retail space being added this year.

Resilient portfolio of suburban malls. Shopper traffic remains healthy in Jul 09 after the Great Singapore Sale (GSS) held in May-Jun 09. Thus, management expects positive rental reversion to be sustainable, going into 2HFY09. Management is confident that valuation will hold up when investment properties are revalued in Sep 09 due to positive rental reversion. In particular, there is room for the valuation of Northpoint to increase due to Asset Enhancement
Initiative (AEI) and subsequent growth in rental income. Gearing will therefore remain below 30%.

Scenario analysis. We conducted a scenario analysis for the acquisition of Northpoint 2 and YewTee Point, assuming the transactions will complete in Dec 10. These acquisitions will be funded by 50% debt and 50% equity, assuming gearing of 35% post-acquisition. Our conclusion: embarking on equity fund raising through a private placement affects unitholders’ value as current share price is well below intrinsic value and the stock is undervalued. We estimate that
a private placement at S$0.80/share, representing 10.1% discount to yesterday’s closing price of S$0.89, dilutes FY10 DPU by 6.0% to 7.6% and reduces the target price by 5.8% to 7.9%.

Frasers Centrepoint Trust (FCT) focuses on suburban malls located next to the Mass Rapid Transit (MRT) stations, which cater to basic necessities and nondiscretionary spending by captive populations in HDB heartlands. Our target price for the stock is S$1.39, based on the Dividend Discount Model (required rate of return: 7.7%, terminal growth: 2.5%). FCT provides FY10 distribution yield of 8.7% and trades at 27.6% discount to NAV/share of S$1.23.