Frasers Centrepoint Trust eyes expansion in China, Australia

FRASERS Centrepoint Trust, which owns three shopping malls in Singapore, may expand in China and Australia, seeking to tap rising consumer spending in the region.

‘We typically would like to go to a market where we’ve got some competitive advantage,’ Christopher Tang, chief executive officer of Frasers Centrepoint Asset Management Ltd, which manages the trust, said in an interview yesterday. ‘China is one of those, Australia is the other.’

Buying shopping malls in China would give Frasers access to a market where retail sales surged 16 per cent in the first nine months of this year, while Australia’s economy is benefiting from the lowest jobless rate in 33 years, which has stoked wage growth and fuelled consumer spending.

Mr Tang declined to specify acquisition targets, saying they were ‘opportunistic’. India is also on the trust’s ‘watch list’ for its expansion plans.

Frasers on June 5 bought a 27 per cent stake in Hektar Real Estate Investment Trust, which owns shopping malls in Malaysia, for RM104.5 million (S$45.4 million).

In Singapore, Frasers will add the Centrepoint shopping mall on Orchard Road to the trust, Mr Tang said, declining to specify a time frame. The Centrepoint mall is owned by Frasers’ parent, Fraser & Neave Ltd.

Frasers on Monday said it will distribute $10.3 million to its shareholders for the three months ended Sept 30, beating its forecast of $9.1 million as it raised rents at its properties.

Frasers fell 2 cents to close at 148 cents yesterday. — Bloomberg

FCT to pay up to $170.5m for Northpoint 2

It will acquire the upcoming shopping mall from its parent firm in Q4 2008

FRASERS Centrepoint Trust (FCT) has entered into a put and call option agreement to acquire the upcoming shopping mall Northpoint 2 for between $139.5 million and $170.5 million, it said yesterday.

The mall, which is being developed by Frasers Centrepoint, will be completed by August 2008. FCT will then acquire it from its parent company in the fourth quarter of 2008.

‘We are doing this (entering the put and call option agreement) now so that we can get a certainty of ownership,’ said Christopher Tang, chief executive of FCT’s manager.

FCT has plans to integrate the upcoming mall with Northpoint, which is already part of its portfolio.

The $30 million asset enhancement programme is expected to be completed by end-June 2009. Together, the two malls will have a combined net lettable area (NLA) of some 232,000 sq ft, an increase of some 56 per cent over Northpoint’s current NLA.

FCT said that the mid-point of the agreed price range for Northpoint 2 – $155 million – is based on an open market valuation. The actual purchase price will be determined by taking the average of two valuations – one each by FCT and Frasers Centrepoint – nearer to the time of the transaction.

FCT also reported its financial results for the fourth quarter ended September 30, 2007 yesterday.

The trust said that distributable income for the three months came to $10.3 million, 13.5 per cent higher than the forecast of $9.1 million as new and renewed leases as well as higher occupancy rates in its malls contributed to increased revenues.

Distribution per unit (DPU) for the quarter came to 1.67 cents, up 13.6 per cent from forecast of 1.47 cents.

Net property income came to $12.8 million, some 2.6 per cent higher than the forecast of $12.5 million.

For its full financial year, FCT reported distributable income of $40.4 million, 11.1 per cent higher than its forecast. DPU came to 6.55 cents, 12.0 per cent higher than forecast. And full-year net property income came to $51.7 million, 3.2 per cent higher than its forecast.

There are no comparable figures for the previous corresponding periods as FCT was only listed on July 5 last year.

FCT has three more Singapore malls awaiting injection into the Reit – Yew Tee Point, Bedok Mall and The Centrepoint. Yew Tee Point will be injected in early 2009 and Bedok Mall in 2010, Mr Tang said. He added that there is no timeline at present for Centrepoint’s injection. The four malls together will double the trust’s current portfolio.

The trust will also look at China and Australia for growth together with Malaysia, where it already has a presence through its stake in Hektar Reit, Mr Tang said.

FCT’s shares closed unchanged at $1.50 yesterday.

Frasers Centrepoint Trust closes first full year with DPU 12% above forecast

• Full year 2007 DPU of 6.55 cents

• FCT to acquire Northpoint 2. Four malls for injection over the next three years

• FCT will start on its second mall enhancement initiative at Northpoint in first quarter 2008

• “We are firing well on all cylinders,” says CEO Christopher Tang

Oversold on perception of high valuation

Market pricing in higher risk premium. Frasers Centrepoint Trust (FCT), like all the other S-REITs, has been sold down severely since early July. Trading yields have expanded by 50bp to 170bp. However, FCT appeared to have been more severely affected. Over the period of early July to late August, the retail REIT sector has lost about 11% of its value; FCT was the poorest performer, losing about 18% of its value; the next poor performer was CapitaMall Trust (CMT) which lost about 14%. We believe the market was punishing REITs with high price to book ratio as the risks of disappointment by these high-growth REITs are now much higher in the current uncertain market.

Price to book is key. Prior to the US sub-prime woes, FCT’s P/B ratio was 1.6x (11th July) and was among the highest within the retail REIT sector, and was second only to CMT (P/B >2.3x). The sector average P/B ratio then was about 1.5x, so it was natural for the market to sell FCT down. However unlike all the other retail REITs, FCT did not revalue its book in its last results. All the other retail REITs performed a revaluation and recognized gains of S$112m to over S$610m, resulting in gains in their respective portfolio of 6.3% to 19%. In other words, FCT’s book is understated and hence its price to book ratio was overstated.

We estimate that if FCT were to revalue its assets, it could achieve a revaluation surplus of at least 17%. This in turn could boost its book value to S$1.28 (from S$1.09), or lower its price to book to only 1.14x, well below the current sector average of 1.28x. Hence we see the sell down of FCT as unjustified.

Upgrade to BUY. The investment case for FCT is simple; pipeline of properties from parent, growth from asset enhancement and finally acquisition in Malaysia. The key issue has been valuation and that has been the reason for our HOLD rating since April 07. However in light of the recent sell-down and the fact that we believe FCT is likely to see a meaningful rise in its book value, we thus upgrade our recommendation from HOLD to BUY while keeping our fair value at S$1.67.

3Q beats forecasts

3Q was better than expected. Frasers Centrepoint Trust’s (FCT) delivered 3Q07 revenue of S$18.9m, up 4.0% YoY, with distributable income of S$10.3m and DPU of 1.67 cents. Distributable income was higher than FCT’s own forecast by about S$1.2m and this was attributed to higher Other Revenue and Income support from its sponsors due to the renovation works at Anchorpoint. The results beat our estimates by about 5%.

Completed acquisition of H-REIT. In the last quarter, FCT announced the completion of the acquisition of a 27% stake in Hektar REIT (H-REIT), a Malaysian retail REIT for S$46.6m as well as a 40% stake in the manager, Hektar Asset Management Sdn Bhd. FCT will fully fund these investments by debt. Even though the current investment into H-REIT is small (H-REIT’s two assets are worth RM523m), and the accretion to DPU is minimal at 0.21 cents, we nevertheless view these investments positively. This is because H-REIT has good growth potential. It has a pipeline of acquisitions that could potentially grow its NLA by 2.3x over the next 3 years. More importantly, these investments provide FCT with an additional avenue of
growth as well as a platform for it to get into the retail market scene in Malaysia.

Asset enhancement on Anchorpoint to complete in 1Q08. FCT is presently revamping Anchorpoint Shopping Centre (ASC). It is repositioning ASC as a village mall concept, offering a wider range of F&B outlets. The project is slated for completion in Nov 2007 and thus will only impact earnings from 1Q08. In terms of lease commitments, FCT has already or is near to securing about 80% occupancy and we do not see an issue in getting 100% commitments by November with the current boom in the retail market space. Beyond ASC, asset enhancement works (AEW) are likely to be carried out at Northpoint and Causeway Point. These projects
are likely to have greater impact on FCT’s earnings due to their significantly larger spaces. However, we do not expect the completion of AEW at Causeway Point until 2008.

Maintain HOLD. While we are positive on FCT’s new growth initiative coming from H-REIT, presently there is not much clarity on the DPU accretion from this acquisition. Hence, we have not factored in this in our valuation. We would prefer to wait for more news before revising our rating and fair value of S$1.67. We thus maintain our HOLD rating for now.