FCT – OCBC
It’s the sponsor’s move now
Asset values likely stable in 2010. Frasers Centrepoint Trust (FCT) booked a revaluation surplus of S$37m in 4QFY09 (end Sep), a 3.5% YoY increase in portfolio value. Surprisingly, this was despite the independent assessor hiking cap rates by 25 basis points for Northpoint (NP) and Causeway Point (CP) and by 65 basis points for Anchorpoint (AP). We are neutral on the retail property segment and believe asset values in 2010 may be supported by the high liquidity environment fostered by global central banks.
Acquisition pricing key risk. FCT is likely (in our view) to acquire retail malls Northpoint 2 (NP2) and YewTee Point from sponsor Fraser & Neave [FNN, NOT RATED] in the near term. In November, FCT and FNN extended their put and call option agreement on NP2, which indicates a price range of S$139.5m to S$170.5m, by six months. No other pricing details are available for the two malls but the manager has indicated that it intends to fund any acquisitions using a combination of debt and equity. Our key concern is accretion – physical prices of retail assets have held up better than the prices of the REITs themselves. While FCT has re-rated significantly, the magnitude of un-levered and levered accretion that FNN is willing to concede to FCT is a question mark.
Further investment into Hektar? Malaysia-listed Hektar REIT [NR] said recently that it is in talks to buy new assets, which may be partially financed through fresh equity. FCT may be unwilling to let its 31.06% strategic stake in Hektar be diluted. So if Hektar launches a rights issue, FCT will probably (in our opinion) subscribe and inject further funds into the REIT. The accretion concern also holds true here – if Hektar’s manager does not utilize capital effectively, it impacts the returns to FCT and consequently to FCT’s unitholders.
It’s the sponsor’s move now. FCT is now trading above our S$1.30 fair value estimate and has appreciated some 17% since our September upgrade. It is currently trading at about 1.07x book value and a forward yield of 6.2% based on our estimates. Relative to an average P/NAV of 1.14x in 2006 and 1.22x in 2007, we note that upside from current levels is limited. Meanwhile, the current forward yield already exceeds the average 6.35% forward yield over 2007 (based on consensus estimates). With limited upside and accretion uncertainty on the potential acquisitions, we believe the risk-reward ratio is no longer compelling. Downgrade to HOLD with S$1.30 fair value (unchanged).