Clear and visible growth

• Organic growth flattish in FY11 as Causeway Point undergoes a facelift

• Earnings could surprise on the upside from potential acquisitions, which could happen in 2011

• Maintain BUY, TP revised to S$1.74 (total return 15%)

Record 4Q10 DPU of 2.16 Scts in line. Fraser Centerpoint Trust (“FCT”) reported a topline and net property income of S$32.5m (+31%yoy, +6%qoq) and S$22.2m (+26%yoy, +3%qoq) respectively, boosted by the contribution from newly acquired Yewtee Point, Northpoint 2 malls and stronger trading performance of North Point 1 post enhancement works (“AEI”). Distributable to unitholders of S$16.5m includes a S$1.6m sum retained from prior quarters (maintaining 100% payout). The portfolio also saw a 3% revaluation gain of S$42.5m (+3%) or an NAV of S$1.29.

Organic growth flattish in FY11 as Causeway Point undergoes a facelift. We continue to see positive rental reversions. For FY10, average rents were renewed at 7% higher rates. Average occupancy levels stood at 98.1%, slightly down from 99.4% a year ago. This is due to lower occupancy rates at Causeway Point (97% in 4Q10 vs 100% in 4Q09) given the ongoing AEI at the mall. While we expect occupancy levels to head down further in the coming quarters as work intensifies, we project limited impact on DPU given that works are phased over a long period of 30 months and earnings in FY11 should be somewhat offset by the full year contribution from YewTee Point and Northpoint.

Bedok Mall could be injected into FCT by 2011. The mall is currently 99% committed and is awaiting TOP in the coming months. The manager is guiding for an injection in 2011 with a potential equity fund raising to part fund this acquisition. We have not factored in this acquisition in our numbers as yet.

BUY call maintained, TP revised to S$1.74. FCT offers investors a solid FY11-12F yield of 5.3-5.5%, backed by resilient earnings from its portfolio of sub-urban malls. Catalysts for further upside to earnings hinges on the acquisition of the Bedok mall asset. BUY maintained with revised TP of S$1.74 as we roll forward our numbers to FY11.

FCT slated to buy Bedok Point next year

FRASERS Centrepoint Trust (FCT) will buy Bedok Point from parent company Fraser and Neave by the second quarter of next year, the trust’s chief executive, Chew Tuan Chiong, said yesterday.

FCT, which owns four suburban malls in Singapore, paid $290 million for two malls – an extension to Northpoint at Yishun and YewTee Point at Choa Chu Kang – from Fraser and Neave’s property arm, Frasers Centrepoint, in January this year.

It paid for those malls by issuing new units and taking on more debt. Dr Chew said that Bedok Point would probably be financed in the same way.

He added: ‘We are also quite keen to increase the liquidity of the stock because it (FCT) is quite tightly held.’

BT understands that Bedok Point could cost around $120-140 million but the final price has not been fixed. The mall, which is now 99 per cent leased, is waiting to receive its Temporary Occupation Permit (TOP).

FCT yesterday announced a distribution per unit (DPU) of 2.16 cents for Q4 2010, up 6 per cent from 2.04 cents in Q4 2009. This takes total DPU for FY2010 to 8.2 cents, a 9 per cent increase over the previous financial year.

Total distribution to unitholders rose 29 per cent for the three months ended Sept 30, 2010 to $16.5 million from $12.8 million a year ago.

Revenue was boosted by the accretive acquisitions of the Northpoint extension (Northpoint 2) and YewTee Point as well as the successful revamp of the older portion of Northpoint.

Portfolio occupancy stood at 98.1 per cent as at end-September. Over the financial year, leases for 8.6 per cent of the portfolio’s net lettable area were signed, achieving average rental reversions of 7 per cent over preceding rents.

FCT also recognised a revaluation surplus of $42.5 million for FY2010, with all four properties recording higher valuations.

During the year, FCT also started the refurbishment of its Woodlands mall, Causeway Point. The enhancement programme is expected to cost $72 million and span 30 months and net property income is targeted to increase by about 20 per cent after that.

Dr Chew is upbeat about the outlook for Singapore’s suburban retail market.

‘We think that the rental levels are going to be sustained and there will even be rent increases together with Singapore’s economic growth and population growth,’ he said.

In FY2011, 241 leases that account for 30 per cent of FCT’s net lettable area will expire and Dr Chew expects good rental reversions on the back of the improving market.

FCT shares fell three cents to close at $1.50 yesterday.

A prime suburban mall play

FCT’s strong acquisition pipeline and pure prime suburban mall exposure puts it ahead of other retail plays, in our view. Suburban mall rent outperformed other malls; meanwhile its parent’s Bedok Point mall is nearing completion. Buy.

Bedok Point may be ripe for acquisition early 2011

Bedok Point, a suburban mall owned by parent F&N is nearing completion. Given the mall is more than 90% pre-committed, injection into FCT may occur early next year. We value Bedok Point at S$130m. While FCT has the debt capacity to fully fund this, we believe an equity raising is likely in order to keep gearing at below 40%. F&N’s 50%-owned Changi City Point is due to complete in 2H11 and may be injected to the REIT in 2012, in our view.

Suburban malls outperform all retailers

Prime suburban malls rents improved 1.4% hoh to S$28.50 psf in 1H10, according to CBRE, vs a 4.1% decline for prime Orchard Road rents and a 6.5% fall in rents for city fringe malls. Prime suburban malls continue to be in demand, with six bids received for a predominantly retail site at Jurong Lake District. Top bidder Lend Lease paid S$749m, or S$650 psf, for the site, which seems high relative to CapitaMall Trust’s Jurong Entertainment Centre’s current valuation of S$750 psf. We estimate a construction cost of S$300 psf for the Jurong Lake site. We believe FCT will benefit, as it is the only pure suburban retail play in Singapore.

Refinancing ahead of time

FCT is in the midst of refinancing its debt of S$260m due in July 2011 (57% of total). We expect debt cost for this to fall to 3.5% from 4.1%. This should bring its average debt cost to 3.5% next year, vs 3.8% now. We have added 2c/share to FCT’s valuation based on this.

Valuation comment

We maintain Buy on FCT with our DCF-based target price of S$1.74. Catalysts would include the potential acquisition of Bedok Point likely in early 2011. FCT yields 5.7% in FY10F and 5.4% in FY11F. The declining yield is due to temporary loss of income as Compass Point is now undergoing refurbishment. We prefer FCT to CapitaMall Trust due the strength of the suburban retail market and FCT’s strong acquisition pipeline.

Asset enhancement starts at Causeway Point

• Results exceeded expectations; maintain Outperform; target price raised to S$1.84 (from S$1.73). 9M10 DPU was above our expectation (82% of our FY10 forecast) though in line with consensus (75% of consensus). The strong performance was attributed to stronger-than-anticipated reversions for Northpoint after asset enhancement and assumption of fewer new units placed out. Management announced asset-enhancement plans for Causeway Point which have just commenced. We increase our base rental assumptions for Northpoint, and factor in the impact of the Causeway Point asset enhancement. Our DPU for FY10 increases 8.5% after higher rental assumptions for Northpoint but falls 2% for FY11 (peak of refurbishment work) before rising 6.8% for FY12. Our DDM target price rises accordingly to S$1.84 from S$1.73 (unchanged discount rate 7.9%). We continue to like FCT for its strong organic growth potential and clear acquisition pipeline from its sponsor.

• 9M10 net property income up 37% yoy, reflecting improved Northpoint contributions after its asset enhancement and maiden contributions from newly acquired Northpoint 2 and Yew Tee Point. There were only seven leases up for renewal in 3Q10, all rising 8.5% over preceding rents, and translating into 2.8% annual growth. Portfolio occupancy was unchanged at 99.4%.

• S$71.8m over 30 months to refurbish Causeway Point. Management has started to refurbish its single largest asset, Causeway Point. Work will include downsizing anchor tenants from the current 65% to 50% of NLA, relocating escalators away from prime space, and building more pro-family features. As revenue contributions form 55% of FCT’s portfolio, asset enhancement will be spread over 30 months to minimise the impact on distribution. Guided ROI is 13% for the S$71.8m capex which is expected to be moderately frontloaded. Some revenue shortfall is expected in 4Q10 as some leases will be pre-terminated to facilitate the refurbishment. However, management expects forward leasing for new space to mitigate the nearterm shortfall in revenue. Management will be fully funding the capex with revolving credit. Cost of borrowing is expected to be under 2%