Category: FCT
FCT – Daiwa
Risk-return looks favourable now, in our view
Rating upgraded to 2 (Outperform) from 3 (Hold)
• We have upgraded our rating to 2 from 3. Although we believe the price drivers are well-known, the risk-return ratio has improved after the most recent three-month unit-price correction, in our view. We maintain our six-month target price of S$1.46 based on parity to our RNG valuation (a finite-life Gordon Growth model).
Immediate catalyst from Causeway Point AEI
• FCT’s immediate price trigger could be management’s asset enhancement initiative (AEI) plans for Causeway Point, which accounts for more than 50% of the overall portfolio value. Our earnings forecasts, which assume passing rents rising to S$11/sq ft by FY13 (with no assumptions for asset enhancement) for Causeway Point, could be revised up on higher rental assumption guidance from management upon the announcement of the AEI. Other earnings and unit-price catalysts could come from a better-than-expected contribution from Northpoint 2, post the AEI, and better visibility on the future acquisition of Bedok Point and possibly One @ Changi City (a 127,490-sq-ft joint venture between the sponsor and Ascendas [Not listed] at Changi Business Park scheduled for completion in 2011).
Major risk: suburban retail is no longer a secret
• The keen investment interest in early 2010 for suburban shopping malls within the public-housing heartlands suggests to us that it might be difficult now for the sponsor to develop (at an attractive rate of return) any more of these prized assets. FCT eventually might have to find revenue growth in overseas.
SREITs – OCBC
1Q10 results review; downgrade sector to NEUTRAL
1Q CY2010 results review. Four out of the eight S-REITs under our coverage reported earnings in line with our estimates. CapitaCommercial Trust (CCT) and Frasers Centrepoint Trust (FCT) beat our DPU estimates by 7.8% and 6.7% respectively. CCT benefited from positive rent reversions and lower property tax that drove a 11% YoY increase in net property income. FCT, meanwhile, beat our estimates (and the manager’s own guidance) on the back of a strong performance from Northpoint post asset enhancement works. Conversely, A-REIT and LMIR Trust missed our earnings expectations for 1Q CY10; with A-REIT missing our DPU estimates because of one-off upfront fees for loans. As a gauge, in 4Q CY09 five REITs reported results in line, three above our expectations and none below.
Guidance was ‘cautiously optimistic’, and growthoriented. Several managers indicated an intention to optimize yield and grow the portfolio both organically (asset enhancement initiatives, including CapitaMall Trust (CMT) and Ascott Residence Trust (ART)) and inorganically (acquisitions, including Mapletree Logistics Trust (MLT)). With this focus on growth, we believe S-REIT’s balance sheet capacity and ability to raise capital will remain key valuation differentiators. It may also be the first time the relatively young S-REIT sector will see REITs refresh their portfolios through divestments and re-developments in a big way (Cambridge Industrial Trust [NOT RATED] has been leading the pack as it de-leverages its balance sheet). Another price differentiator, in our opinion, will be the manager’s skill in optimizing yield through asset works: CMT and FCT, for instance, have a proven track record in this area in our view.
Volatility in the near term. Year-to-date performance of the S-REIT index is slightly negative (-0.7%) at 613.58 points. The recent volatility in the market has led to ~100 basis point movements in yields – we think this volatility will continue as macro-economic concerns, this time in Europe, take a front seat again. In our view, investors may consequently ascribe a higher risk premium (that is, higher yields and lower price-to-book ratios) to the S-REIT sector in the near-term. Nonetheless, we see selective opportunities to pick up strong REITs at attractive valuations (on a longer time horizon), after careful scrutiny of return versus risk. In an uncertain environment, we prefer REITs with a strong earnings outlook and strong balance sheets. We tilt slightly defensive in our top picks and favor FCT, MLT and ART with estimated total returns of 19%, 19.8%, and 21.7% respectively. Downgrade broader sector to NEUTRAL on a more cautious view.
FCT – Daiwa
Potential price drivers are well known
What has changed?
• Frasers Centrepoint Trust (FCT) announced its 2Q10 (FYE June) results on 23 April 2010. The distribution per unit (DPU) of 2.06¢ was 1.5% above forecast.
Impact
• Gross revenue was 1.6% better than our forecast, due largely to higher-than expected (non-rental) revenue from Causeway Point, while net-property income (NPI) was 5.9% above our forecast due to lower-than-expected operating expenses at Northpoint and Anchorpoint (as well as the revenue from Causeway Point). FCT achieved an average rental-reversion increase of 6.6% for renewals and new leases for the quarter. The contributions from the new acquisitions were in line. Higher-than-expected management fees, borrowing costs, and the retention of about S$1.1m in distributable income offset the strong showing at the NPI level.
• We have revised up our DPU forecasts by 0.7-1.7% for FY10-12, after revising up our NPI forecasts by 1.2-1.8% and adjusting downward our net tax adjustments assumptions. Our forecasts do not include any asset-enhancement initiative (AEI) assumptions for Causeway Point. The manager indicated that it expects to announce plans for this project before the next results briefing. The manager expects the construction of Bedok Point (by the sponsor) to be completed in early 4Q10. FCT acquired Northpoint 2 and YewTee Point from the sponsor about one year after they were completed. Given the relatively minor DPU accretion for these two acquisitions (based on the circular forecast), we have not included Bedok Point in our forecasts or valuation.
Valuation
• We have raised our six-month target price, based on our parity to our RNG (a finite-life Gordon Growth model) valuation, to S$1.46 from S$1.44. Our valuation assumes an effective cap rate of 5.25% (a discount rate of 7.75% and an internal growth rate of 2.5% for the remaining leasehold period) for FCT’s portfolio. For Causeway Point, we have assumed a mid-cycle passing rent of S$11 psf.
Catalysts and action
• We maintain our 3 (Hold) rating for FCT, which looks nearly fully-valued (already trading at an 18% premium to its NAV as at 31 March), given the marginal upside to our target price. We also believe the potential unit-price drivers (Causeway Point AEI and Bedok Point acquisition) are well known.
FCT – CIMB
Asset enhancement on the way
• DPU meets expectations; maintain Outperform. 2QFY10 results met Street and our expectations. 2HFY10 DPU was 54% of our full-year forecast. FY11 growth should be driven by asset enhancement at Causeway Point which could start within the year. We continue to like FCT for its resilient income streams and ability to grow organically and via acquisitions. We maintain our estimates, DDM target price of S$1.73 (discount rate 7.9%) and Outperform rating. We see stock catalysts from organic growth after Causeway Point has been enhanced.
• YTD DPU of 3.97cts met our expectations despite the retention of S$1.1m of distributable income in 2QFY10. YTD net property income of S$36.3m grew strongly by 31.8% yoy, boosted by maiden contributions from North Point 2 and Yew Tee Point in 2Q10.
• Healthy rental reversions. Average rental reversions were positive at 4.5% over preceding rents for the 50,852sf (or 6.4%) of net lettable area renewed in 1HFY10. Reversions were better in the second quarter with a 6.6% increase from the first half of 4.5%. Occupancy was almost full at 99.4%, gaining ground from the 98.6% in Dec 09.
• Upward reversions for Causeway Point from lease expiries and asset enhancement. FCT has only 3.2% of NLA from 36 leases left for renewal in this financial year. However, next year’s leases renewals would be chunky at 30% of NLA. About half of these leases, or 167,342sf, will be from Causeway Point. Separately, the manager is preparing for asset enhancement work at Causeway Point. Announcements should come before the end of 3QFY10. We believe both events represent good upward-reversion opportunities as the occupancy cost of this asset is considerably low at 12% vs. FCT’s weighted average of 14.2%.
• Bedok Mall due for completion in 4Q10. One of the key assets in the pipeline from the sponsor, Bedok Mall, should be completed by 4Q10. With an estimated 1-year gestation, we believe this asset could be ready for injection into FCT by end-CY11, likely after the completion of asset enhancement work at Causeway Point. Management guides that debt and equity will be used for this acquisition.
FCT – BT
Frasers Centrepoint Trust posts Q2 distributable income of $15.9m
FRASERS Centrepoint Trust (FCT) yesterday posted income available for distribution of $15.9 million for its second quarter ended March 31, 2010, an increase of 31 per cent from a year ago.
FCT’s Q2FY10 distribution per unit rose 11 per cent to 2.06 cents. It said $1.1 million of Q2 income will be retained for distribution in the second half of FY2010.
Chew Tuan Chiong, chief executive officer of the trust’s manager, Frasers Centrepoint Asset Management, said: ‘FCT achieved record quarterly gross revenue and net property income of $28.3 million and $20.4 million respectively this quarter.’
He added: ‘In addition to existing assets all achieving higher revenues, this excellent financial performance was made possible by the accretive acquisitions of Northpoint 2 & YewTee Point. These acquisitions achieved our strategic aim to enlarge FCT’s asset base, thereby allowing us to reap the benefits of scale and income growth.’
FCT acquired Northpoint 2 & YewTee Point in February 2010, with total assets growing 26 per cent to $1.5 billion as a result.
The trust said net property income was supported by topline growth and tight cost controls. Portfolio occupancy rose to 99 per cent as the existing and the newly acquired malls registered full or close to full occupancy.
‘As we continue to build upon the strong foundations of FCT’s portfolio, we will announce in due course our plans to revamp Causeway Point, with a view to capitalising on the recovery in Singapore’s economy and retail sentiments,’ said Mr Chew. ‘By improving its retail mix and amenities, a rejuvenated Causeway Point would better serve the needs of the 300,000 residents living within its trade catchment.’