Category: FCT
FCT – DMG
Drop in share price presents buying opportunity
Reiterate our top pick for S-REITs. Against the uncertain outlook revolving around weak US and China data, European debt crisis, and China’s property cooling measures, we reiterate our OVERWEIGHT stance on S-REITs which offer a current dividend yield of 6.9%. Our top pick within the space remains Frasers Centrepoint Trust (FCT) which owns prime suburban malls that are experiencing strong positive rental reversion. Despite the Asset Enhancement Initiatives (AEI) at Causeway Point (CWP) which saw occupancy fell to 69% during 1Q11, FCT’s DPU were not affected much due to contribution from its Northpoint 2 and Yew Tee Point which were acquired in Feb 2010. Backed by 1) strong pre-commitment for CWP’s space being redeveloped under AEI, 2) strong rental reversion, and 3) potential acquisition of Bedok Point in 2H11, we believe FCT is primed for growth at cheap valuation. Maintain BUY with TP of S$1.77 based on DDM (COE: 8.8%; TGR: 2.0%).
CWP AEI expected to be completed by Dec 2012. In addition to positive rental reversion from new leases expected at +11-12%, the progressive completion of CWP AEI will add to FCT’s DPU growth. Construction of CWP is currently 33% completed. Despite full completion requires another 1.5 years, the space undergoing refurbishment has been 99% pre-committed, indicating the strong demand for the mall space. Upon completion, the average rent is projected to rise 20% from S$10.2 to S$12.2, giving rise to ROI of 13.0%.
Undemanding valuation given clear growth profile. At S$1.49, FCT is trading at a yield of 3.8% to Singapore’s 10-year bond yield of 2.3%, which is significantly higher than its pre-crisis mean spread of 1.8%. Coupled with its clear growth profile going forward (positive rental reversion, completion of CWP AEI, and acquisition of Bedok Point), we favour FCT as our top S-REIT pick for 2011.
FCT – BT
Frasers Centrepoint Trust results improve for Q2, H1
FRASERS Centrepoint Trust (FCT) yesterday reported better results for both the second quarter and half year ended Mar 31.
Gross revenue in Q2 rose 2 per cent from the previous year to $28.8 million, with the increase coming mainly from Northpoint 2 and YewTee Point which were bought last year.
Contributions from these malls helped offset the drop in takings from Causeway Point, which is undergoing asset enhancement works.
Net property income slipped 1.3 per cent to $20.1 million. Distribution to unitholders rose 7.8 per cent to $16 million.
Distribution per unit (DPU) in Q2 was 2.07 cents, up slightly from 2.06 cents in the previous year.
For the first half of the year, gross revenue increased 9.5 per cent year-on-year to $56.4 million, and net property income was up 6.7 per cent to $38.7 million.
Distribution to unitholders grew 15.5 per cent to $31 million. As a result, DPU in H1 was 4.02 cents, higher than 3.97 cents a year ago.
FCT’s portfolio occupancy rate in Q2 dropped to 82.9 per cent from 92.1 per cent a quarter ago as refurbishment works at Causeway Point continued. At the mall itself, just about 69 per cent of space was taken up at Mar 31.
Chew Tuan Chiong, CEO of FCT’s manager, said at a briefing yesterday that Causeway Point is now 68 per cent occupied but that should climb gradually to over 80 per cent towards end-June.
Upgrading works were 33 per cent completed in March, and tenants had pre-committed to 99 per cent of space undergoing refurbishment. FCT projects that the average rent at Causeway Point post-refurbishment would be $12.20 per square foot – 20 per cent higher.
FCT is still aiming to acquire Bedok Point this calendar year. The mall opened in December last year and ‘we wanted to see at least some months of stabilisation,’ Mr Chew said.
FCT gained one cent on the stock market yesterday to close at $1.50.
FCT – CIMB
Riding on retail growth
• Maintain Outperform. We expect strong job and wage growth to support retailsales (ex-auto) growth of about 7% for Singapore this year (7.2% in 2010) and growth in real private consumption of 3-3.5% (4.2% in 2010, 0.2% in 2009). With FCT’s portfolio of well-located retail malls, we expect the strength to drive up occupancy rates and rental reversions at FCT’s retail malls. Ongoing enhancement at Causeway Point and any upside from higher turnover rents should also support organic growth while an impending injection of Bedok Mall from its sponsor could provide acquisition catalysts. Maintain Outperform and DDM-based target price of S$1.86 (discount rate 7.9%). We see catalysts from announcements of accretive acquisitions.
• Positive rental reversions expected. Notwithstanding lower Causeway Point income during its refurbishment, contributions from acquisitions and higher rental reversions lifted FCT’s 1Q11 NPI by 17% yoy. With positive rental reversions expected from stronger retail sentiment and ongoing asset enhancement at Causeway Point, its largest asset, we are expecting a stronger 2H11.
• Acquisition catalyst from Bedok Mall injection. Bedok Point received TOP in Nov 10. With the asset 98% leased as at end-1Q11, we see acquisition catalysts from an expected injection into FCT (targeted for CY11). Any accretion should also provide upside to our estimates.
Retail REITs – CIMB
Towards greater heights
• Yoy, January retail sales ex-auto rose to their highest in 11 months. While seasonality may have distorted the data as Chinese New Year celebrations fell earlier this year than in 2010, January’s 15.6% growth was nonetheless the 15th consecutive month of positive yoy growth. The increase was also broad-based with department-store sales up 21.5% yoy, sales of apparel & footwear up 16.7% yoy and sales of watches & jewellery up 14% yoy. These segments were the leading contributors.
• New weightings and new base year for index. Every five years, government statisticians would re-weight components in Singapore’s retail sales index to “reflect changes in the structure of retail trade and food and beverage services industries.” The new base year is now 2010 instead of 2005 and the most significant change is a cut in the weighting for auto sales, from 34.5% to 24.7%. Auto sales in Singapore are affected more by the government’s private-transport policy than consumer sentiment. On the other hand, the weights for other key segments have been raised: department-store sales (+2.03% pts), apparel and footwear (+1.72%), watches and jewellery (1.63%) and tech goods (1.9%). Despite auto’s lower weighting, headline retail sales are still distorted by auto sales and this is the reason for our preference for retails sales excluding auto as a better proxy for underlying consumer sentiment.
• Discretionary spending to remain robust despite external shocks. Strong job and wage growth is likely to support further retail-sales (ex-auto) growth of about 7% this year (7.2% in 2010) and growth in real private consumption of 3-3.5% (4.2% in 2010, 0.2% in 2009). We do not expect the Japanese disasters or the unfolding events in North Africa/Middle East to have a long-lasting impact on private consumption unless global business confidence is dented in a major way in the coming weeks or months. While international airlines have been reporting light passenger loads going into Japan, outbound flights are full. And while the Japanese disasters might reduce Japanese arrivals in the near term, we maintain our overall tourist-arrival growth forecast of 8-10% for this year, to 12.8m (11.6m in 2010, government forecast of 12m-13m).
• Stock implications: FCT and CMT well-placed. With stronger retail sales expected to benefit retail tenants and drive up occupancy rates and rental reversions, we expect retail REITs like FCT and CMT to be beneficiaries. Between the two, we prefer FCT for its organic growth from asset enhancement at Causeway Point, acquisition growth potential and more resilient rental profile.
FCT – OCBC
Refurbishment works drive down 1Q11 Results
Refurbishment works drive down 1Q11 Results. FCT reported S$23.5m of 1QFY11 revenue, up 18.5% YoY but down 15% QoQ. The YoY increase follows the acquisitions of Northpoint 2 and YewTee Point on 5 Feb 2010. The QoQ decline was primarily the result of asset enhancement works at Causeway Point (CWP), which has caused CWP’s gross rent income to dip 24% YoY and 22.8% QoQ. On a quarterly basis, we also noted that 1Q11 gross revenue income1 for YewTee Point and Northpoint (aggregated income) were down 9.9% and 14.7% respectively. We understand from FCT that there is typically a one-month accounting lag for computing tenant’s gross turnover. Thus, one should expect to see the Dec festive retail sales figures boosting the variable component of retail leases subsequently in Jan 2011. Overall portfolio occupancy was down 6pp YoY and 6.5pp QoQ to 92.1% due to the refurbishment works. Distributable income was also up 25% YoY but down 9.2% QoQ at S$15m, and noticeably 24% above 1Q11 operating cash flow2 . DPU amounts to 1.95 Scents, which trades ex-date on 27 Jan. FCT’s gearing ratio stands at 30.6%, with a weighted average cost of debt of 3.76% and interest cover of 3.69x as at 31 Dec 2010. It has recently also secured a five-year loan facility to pay down a $260m commercial mortgage-backed security expiring in July 2011.
CWP’s AEI update. As at Dec 2010, 13% of the construction works at CWP have been completed, with all works scheduled for completion by Dec 2012. Retailers have pre-committed 92% of the space on level one, where most of the work is currently taking place. FCT has projected an incremental annual NPI of S$9.3m for CWP’s enhancement, which is expected to contribute to the group’s bottom-line by 2013, with an overall ROI of 13%. The average rent is also expected to increase from S$10.20 psfpm before AEI to S$12.20 psfpm post-AEI.
Cautious on Outlook. We remain cautious on the outlook for suburban malls, on the back of new supply of retail space to be added in 2011-2012, which is expected to depress rental growth at the neighbourhood malls. In fact, CBRE forecasted that suburban rents are likely to see a maximum 3% upside in 2011 as tenant’s resistance sets. FCT continues to trade at a tight FY11F yield of 5.4%, and 18% premium to book value. We thus maintain our HOLD rating for FCT, with an unchanged fair value of S$1.58, on rental cap grounds. Further re-rating catalyst, in our view, would stem from the manager announcing further acquisitions or development projects opportunities.