FCT posts Q2 income of $10.3m

FRASERS Centrepoint Trust (FCT) yesterday said that its distributable income for the second quarter ended March 31 came to $10.3 million, or 1.67 cents per unit. The figures were higher than the forecast distributable income of $9.1 million, or 1.46 cents a unit. There were no comparable figures for 2006 as FCT was only listed on July 5 last year. Net property income for the three months came to $13.4 million.

The trust said that the stronger than expected performance was mainly due to higher turnover during the festive period. ‘Historically, increased shopper activity during the festive period has provided a seasonal boost to turnover rent during the January to March quarter,’ said FCT. ‘On average, turnover rent for the January to March quarter has been three-fold higher than that of a normal quarter.’

The increase was also helped by improved carpark income due to higher vehicle count, and additional income derived from casual leasing resulting from the increase in demand for atrium space, kiosks and advertising.

FCT said that it has four assets lined up for acquisition: Northpoint 2, YewTee Point, Bedok Mall and The Centrepoint. ‘It is our plan to start acquiring Northpoint 2 and YewTee Mall by the fourth quarter of 2008,’ said Christopher Tang, chief executive of the Reit’s management team.

FCT shares closed one cent up at 1.71 yesterday. The trust’s stock price has climbed 11.8 per cent since the start of the year.

FCT posted an in-line set of 2Q07 results with distributable income exceeding IPO forecast by 14.4% to $10.3m (DPU: 1.67cts), thanks to higher rental and other income. Going forward, the focal point of FCT would be on its asset enhancement and acquisition activities. Over the next 2 years, Anchorpoint would be repositioned as a F&B-focussed village mall while retail areas at Causeway Point and Northpoint would be reconfigured to increase returns. In terms of acquisition, its plan to double floor space under management is certain but would happen only from early FY09 onwards.

FCT is currently trading at FY07 yield of 3.7% and P/book NAV of 1.1.57x, indicating much of its growth expectations could have been priced in. We have raised price target to $1.86 but lower our call to Hold on valuation grounds.

Results in line with expectations. Distributable income was 14.4% ahead of IPO forecast to $10.3m (DPU: 1.67cts) while topline came in 3.9% ahead of projections to $19.6m. The better performance was due to higher rental income and lower than projected operating expenses.

Lifted by greater rental and other income. The rise in revenue was due to a threefold increase in turnover rent during the Chinese New Year period. Higher patronage during this festive period also resulted in increased carpark and casual leasing income. During the quarter, a small 0.4% of FCT’s portfolio was renewed, however, rentals achieved were at a significant 10% above the preceeding level.

FCT offers significant organic growth potential. Going forward, the focus for FCT would be on its AEI and acquisition potential. Enhancement activities at Anchorpoint are scheduled to begin in May 07. It would also look to boost returns from Causeway Point and Northpoint by reconfiguring and rejigging tenant mix when the leases are up for renewal. An estimated 45% and 50% of NLA at Causeway Point and Northpoint are expiring over the next 18 months. .

Acquisition pipeline is certain. FCT is committed to double the area under management to 1.3msf NLA in the medium term. In the pipeline are Northpoint 2 and YewTee Point, scheduled to complete in early FY09, as well as the Bedok Town Centre and Centrepoint. Together, these properties could provide a further 0.63msf GFA.

Raised price target to $1.86 but downgrade to Hold. While we still like FCT for its strong organic growth potential and visible pipeline, this appears to have been largely factored into share price. The stock is trading at FY07-FY08 yields of 3.7-4.4% and P/book NAV of 1.57x. Our price target of $1.86, based on doubling asset base to $2b, offers less than 10% upside.

Downgrade on valuation

2Q was better than 1Q07. Frasers Centrepoint Trust (FCT) reported 2Q07 revenue of S$19.6m (+1.9% QoQ) and distributable income of S$10.3m (+8.7% QoQ). Distributable income per unit (DPU) came in at 1.67 cents (1Q07: 1.54 cents). The better results were due to higher turnover rent (as a result of the Chinese New Year period), better reversion in rental rates, higher casual leasing and lower costs. FCT also benefited from S$0.198m from its sponsor as a result of the revamping of Anchorpoint.

Tweaking forecast. With tighter cost control and better operating matrix, we are adjusting our FY07F DPU from 5.95 cents to 6.31 cents, but maintaining FY08F DPU of 7.57 cents. Growth will come from its acquisition pipelines; namely Centrepoint, Northpoint 2, Yew Tee Point and Bedok Mall. The latter will be redeveloped by FCT’s sponsor, Fraser Centrepoint Ltd (FCL). In terms of timeline, Northpoint 2 and Yew Tee are likely to be acquired by late 2008 with the Bedok site probably in 2010. We do not expect any funding issue as FCT has recently obtained a credit rating, meaning that its current gearing of about 27% can be raised to 60%. This translates to a war chest of over S$300m.

Asset enhancement starts in 2Q07. FCT has scheduled Anchorpoint Shopping Centre (ASC) for reconfiguration in May 2007. It intends to reposition ASC as a food mall and work is expected to be completed in 6 months. Beyond ASC, asset enhancement works (AEW) are likely to be carried out at Northpoint and Causeway Point. These latter projects are likely to have greater impact on FCT’s earnings due to its significantly larger size. However, we do not expect the completion of AEW at Causeway Point until 2008.

Downgrade to HOLD. FCT has done very well, rising over 65% above its IPO price and surpassing our fair value of S$1.59. The current price means that dilution from new units will be less. This in turn has a positive impact on our valuation. We thus raised our fair value estimate to S$1.67. At current trading range, FCT’s P/B is high at about 1.6x and trading yield is low at only about 3.7%. While we continue to like FCT for its exposure to the retail sector, strong asset enhancement possibilities and clarity in acquisitions, at current valuation, FCT no longer looks compelling. We thus downgrade our rating on FCT from BUY to HOLD.

Small is beautiful

1Q07 DPU slightly above expectations. FCT’s 1Q07 DPU of 1.54 cents is slightly above our estimates. Gross rental revenue of S$19.2m grew 8.1% y-o-y, mainly attributed to positive reversions from renewals and new leases, as well as higher carpark income and additional income from leasing of Atrium space, etc. Net property income grew 4.2%, mitigated by higher expenses. Occupancy for FCT’s portfolio continues to be healthy at 98.8%, slightly affected by Anchorpoint currently repositioning into a village-mall concept. Distributable income was S$9.47m, 4.3% above FCT’s own forecast.

Further expansion of pipeline. To recap, moving forward we expect FCT to focus on asset enhancement plans in the near term, followed by planned acquisitions. Asset enhancement is targeted to commence from Jan 2007 and span 20 months for each of the three properties in the initial portfolio. Acquisition pipeline in the near term remains status quo with Centrepoint property and Yishun extension to complete in FY08 and FY2010 respectively. In the longer term, Frasers Centrepoint (“FCL”) has recently acquired two properties in Bedok Town Centre for S$40.8m as well as an option agreement to acquire Yew Tee Point from NTUC Choice Homes, expected to complete in 2009. Therefore, small is beautiful for FCT which is slowly but steadily expanding its acquisition pipeline which we estimate to double to S$1.8bn by 2010.

Maintain hold with raised TP at S$1.53. We have rolled forward our DCF estimates to FY2011, maintaining a five-year investment horizon. Besides incorporating acquisition assumptions for Centrepoint and Yishun property to be completed by 2008 and 2010 respectively, we have also included potential acquisition of the Bedok property and Yew Tee Point in our estimates. Therefore we are raising our target price to S$1.53 based on DCF valuation but maintain our Hold recommendation for FCT.