Next step: Changi City Point acquisition

• 4Q13 DPU of 2.98Scts in line.
  
• AEI-driven reversion rates to moderate from FY14
  
• Acquisition of Changi City Point in FY14 to drive earnings
  
• Maintain BUY, TP S$2.14
  

Highlights

4Q13 results in line. FCT’s 4Q13 gross revenue grew to S$40.2m (+3% y-o-y), while NPI fell slightly to S$27.3m (-5% y-o-y). Revenue growth was attributable to higher contributions from Northpoint and Causeway Point, which together contributed c.80% of earnings, while, the decline in NPI was due to higher maintenance expenses, as well as the backdating of property tax for the Trust’s assets, which is expected to be one-off. The 4Q13 DPU of 2.98Scts includes S$2.9m in cash retained from 1H13.

NAV per unit increased 16% on revaluation gains. FCT recorded S$196m of revaluation gains, driven partly by cap rate compression of 15-25bps for all assets to 5.2%-5.6%, which is in line with other major retail malls across Singapore. NAV per unit increased to S$1.77 (vs. S$1.53 previously), and gearing decreased 2.5ppts to 27.6% correspondingly.

Our View

Strong AEI-driven reversions to moderate from FY14 onwards. In FY14, FCT will renew 32% of its income, out of which 75% will be derived from Causeway Point and Northpoint. We expect positive rental reversions from these two malls, given the strong shopper traffic and tenant sales. However, we expect more moderate reversion rates compared to previous years, as a significant amount of upside from the AEI works have already been captured. Bedok Point is likely to face increasing difficulty in operations, with competition from the larger Bedok Mall nearby. As 51% of its leases will be up for renewal in FY14, the Manager expects more tenant churn at the property going forward. Strategies that the Manager has put in place include: (i) bringing in a new anchor tenant (electronics and appliances shop) to pull in the crowd; and (ii) to reconfigure its lease structure to lower the fixed rent base with a higher turnover component, to ride out the uncertain outlook.

Acquisition of Changi City Point to be key earnings driver in FY14. According to the Manager, application for strata-subdivision at Changi City Point (CCP) ‘is progressing well’, and it is optimistic about acquiring the mall in FY14. We expect the acquisition to be completed by 2Q/3Q14.

Recommendation

Maintain BUY, TP S$2.14. Post-portfolio revaluation, the Trust is currently trading at 1.05x P/BV, which we believe is attractive, given its visible acquisition pipeline. We maintain our BUY rating, with TP unchanged at S$2.14 based on DCF.

Repeating its success

• 4QFY13 DPU up 10.0% YoY
  
• Positive reversion of 10.8% achieved
  
• Bigger malls likely to underpin growth
  

Consistent set of 4QFY13 results

Frasers Centrepoint Trust’s (FCT) 4QFY13 NPI fell 5.0% YoY to S$27.3m on higher property expenses. However, distributable income was up 2.7% to S$21.7m as FCT benefited from lower borrowing costs and higher distribution from Hektar REIT. In addition, S$2.9m of cash (0.35 S cents/unit) retained in 1HFY13 was distributed during the quarter. Consequently, DPU jumped 10.0% to 2.98 S cents. For FY13, NPI grew 6.9% to S$111.6m, whereas distributable income rose 9.5% to S$90.1m. Full-year DPU came in at 10.93 S cents (+9.2%), spot on with our DPU projection (consensus: 11.0 S cents). This, we note, marked FCT’s seventh year of consecutive DPU growth since its listing.

Leasing demand remained robust

Expectedly, Causeway Point (CWP) remained the main revenue generator, raking up 7.4% growth amid improved occupancy and rental rates. During the quarter, however, the mall was subject to higher property taxes (significant portion backdated from 2010 to 2012) and maintenance costs (higher amount budgeted ahead for the year). This brought CWP’s NPI down by 6.7%. Nevertheless, we note that overall performance remained robust, with portfolio occupancy maintained at a high 98.4%, while positive rental reversion of 10.8% was achieved. We also understand ~2% of retail space at YewTee Point is expected to start operating in Oct, which is likely to improve the mall’s occupancy. For Bedok Point, management also updated that it has successfully secured an electronics retailer as its anchor tenant for basement one. This may translate to a more stable performance at the mall.

Upgrade to BUY

Looking forward, FCT reiterated CWP and Northpoint will continue to perform, as leases at the malls amounting to 75.5% of FCT’s gross rent are due for renewal and positive reversions are still expected. FCT also revealed that the strata title division of One@Changi City is progressing well, and that the asset injection may take place in 2014. We are rolling our valuation to FY14, while keeping our forecasts largely intact. Our fair value is in turn raised to S$2.02 from S$1.96 previously. As upside now looks compelling, we upgrade FCT from Hold to BUY.

Ready for next stage of growth

With footfalls returning to the pre-asset enhancement initiative level and the increase in sales per sq ft, we expect Causeway Point to continue to grow albeit at a slower rate. The next stage of growth is expected to come from the accretive acquisition of Changi City Point.

4QFY13 results are in line, with DPU accounting for 28% of our full-year forecast and FY13 results at 103%. We tweaked our model to account for the slightly better-than-expected results. Maintain Outperform with higher DDM-based (discount rate: 7.4%) target price of S$2.05, given re-rating catalysts from accretive acquisitions and strong rental reversion.

Big malls continue to be the focus

4QFY13 results were respectable, mainly due to the contribution of 0.35 Scts from cash retained in 1H13. Distributable profit before retained earnings made up 25% of our full-year forecast. During this quarter, NPI was down by 5% yoy as a result of higher property tax and maintenance expenses. For the full year, FY13 NPI growth of 6.9% was mainly led by Causeway Point and Northpoint. During this quarter, the performances of Anchorpoint and Bedok Point were weak, mainly due to lower revenue and higher property expenses. However, we believe the performances of these malls will stabilise henceforth, with Anchorpoint's occupancy expected to climb from its current level of 96.9% and rental rates at Bedok Point to steady.

Awaits acquisition

With 31% and 37% of leases (as % of total NLA) due to be renewed in FY14 and FY15 respectively, the majority of which are concentrated in Causeway Point and Northpoint, we expect rental reversions to continue for some years. Also, Changi City Point's acquisition is expected to be FCT's next growth catalyst.

Grow through acquisitions

With a gearing of 27.6% and several ongoing projects from its sponsor, we believe FCT is well-positioned to benefit from a steady pipeline of potential future acquisition targets.

Cause to remain positive

• 2Q13 results ahead
  
• Organic growth to remain stable; acquisition of Changi City Point to provide catalysts for earnings upside
  
• BUY, TP raised to S$2.33
  

Highlights

2Q13 results ahead. Frasers Centerpoint Trust (FCT)’s 2Q13 topline grew 8.4% to $39.8 million, and NPI saw a 9.7% growth to $28.7 million, attributable to higher contributions from Causeway Point and Northpoint, with other malls remaining stable. Rental reversion for the quarter was 10.1%. Causeway Point saw higher lease commencements and rental reversions upon completion of AEI works. Average gross rental was $13.52, exceeding our estimates of S$13.10. Occupancy achieved a high of 99.6%, bringing FCT’s average portfolio occupancy to 98.2%. Property expenses grew 5.5% to $11 million, attributable to higher property management fees and property taxes at Causeway Point and Northpoint. DPU grew 8% to 2.70 cents.

Our View

Organic growth to remain strong. Looking ahead, with only 7.6% of NLA due to expire for the remainder of the year, earnings in the 2HFY13 looks resilient. Management expects growth to be driven by Causeway Point (CWP) and Northpoint (NP), where close to c.37% and c.16% of the property’s leases will be up for renewal. Monthly pedestrian footfalls for CWP and NP are high at c.2m and 3.5m respectively. Although shopper traffic at Causeway Point has yet to reach pre-AEI levels but is a y-o-y increase of 22%. Management mooted for a possible re-launch, which is expected to increase the mall’s traffic. In addition, occupancy costs remaining in the midteens, we continue to expect upside during rent renewals in the coming quarters.

Changi City Point (CCP) acquisition to materialise? Management believes that the asset has stabilised and is ready for injection. FCT would like to acquire it prior to the start of its first rental cycle come FY14 where the mall is expected to see an uplift in rentals coupled with a more stabilized tenant mix.

Recommendation

BUY maintained, TP raised to S$2.33. We have tweaked our estimates for CWP upwards to account for the strong rental performance and have forecasted a CCP acquisition by end of FY13, assumed at S$400m at a yield of 5.25%, funded by a mix of debt and equity. TP is thus raised to S$2.33 based on DCF. BUY.

STILL BENEFITTING FROM AEI

• In-line 1QFY13 results
  
• Occupancy to improve further
  
• Balance sheet remains robust
  

Continued growth in 1QFY13

Frasers Centrepoint Trust (FCT) reported 1QFY13 NPI of S$27.1m and distributable income of S$21.8m, up 9.1% and 10.8% YoY respectively. Of the available distributable income, we note that S$2.1m will be retained this quarter, as opposed to S$1.6m in 1QFY12. As such, DPU for the quarter came in at 2.40 S cents, representing a YoY growth of 9.1%. This is largely in line with expectations, given that the quarterly DPU met 22% of both our and consensus FY13F DPU estimates.

Operating indicators largely positive

All the five malls within FCT’s portfolio registered healthy growth in income during the quarter. However, Causeway Point (CWP) and Northpoint remained the key drivers, generating 12.3% and 6.7% YoY increase in NPI. Operationally, we note the overall portfolio occupancy improved from 93.6% in prior quarter to 97.2%. This was boosted by an 8.7ppt QoQ improvement in occupancy at CWP to 96.4% following the completion of its AEI, which cushioned the temporary weakness at Bedok Point amid a reconfiguration of its layout. Overall, a total of 62,341 sqft of NLA (7.1% of portfolio NLA) was renewed at an average positive rental reversion of 5.2% in 1Q (4QFY12: 8.9%). Management also revealed that several new tenants are still in the process of fitting out at CWP and expects the occupancy to trend up further when more tenants commence their operations from Jan onwards.

Maintain BUY

On the acquisition front, we understand that Changi City Point remains a feasible pipeline asset, but the regulatory procedures for the strata division into its retail, business park and hospitality components is a lengthy process. FCT currently boasts a strong aggregate leverage of circa 30.9% and extended debt maturity of 3.6 years following the recent issue of S$70m MTN. This is likely to put it in good stead to take any attractive acquisition opportunities as they arise. Maintain BUY with an unchanged fair value of S$2.13 on FCT.