Making waves again

• A set of in-line results

• Steady performance supported by healthy rental reversion and acquisitions catalyst in the pipeline

• Maintain BUY at a higher TP of S$2.04

Highlights

Meeting the mark again. FCT’s 4Q12 topline and NPI grew by about 14% and 13% respectively as the REIT continued to reap the benefits of rental uplift at Causeway Point, post AEI works, and the additional contribution from Bedok Point that was acquired in August 2011. Rental reversion for the quarter was 8.2% supported by close to 100% occupancy (excluding Causeway Point which is undergoing AEI works). Consequently DPU came at 2.71 ct, putting the full-year DPU at 10.01 cts. This was 20.3% y-o-y and 5% higher than our FY12 forecast but is in line with street estimates. The outperformance was largely coming due to the better performance for Yew Tee Point and Anchor Point. FCT also took in a revaluation gain of 100.7 m translating to a 8.5% increase in NAV to S$1.53. The revaluation gain was largely driven by Causeway Point, post AEI works and the improved earning power of Northpoint with a 15 bbp and 40 bbp cap rate seen in Northpoint, Yew Tee Point and Anchorpoint..

Our View

Steady rental positive reversion anticipated. Causeway Point AEI is on track to open at the end of the year and occupancy is expected to improve sequentially going forward. Meanwhile, c.20% of the portfolio’s NLA will be up for renewal in FY13 with more than half coming from Northpoint and Causeway. Management says that while there is room to further tweak the tenant mix or AEI works at some of the malls, they will be on a smaller-scale basis. Hence, we believe operations should remain steady, while the reversion coming from causeway point should continue to reap the benefits of the AEI works. Occupancy cost is at 15-16%, a tad higher than a year ago (14-15%).

Recommendation

Maintain BUY at a higher TP of S$2.04. Stock remains attractive for its defensive earnings profile. We have raised our DCF-backed TP by 5.6% and FY13/14 DPU by 3-5% to account for the better than expected rental achieved at Anchorpoint and Yew Tee Point, higher FY13 occupancy assumption of Causeway Point (estimated at 98% vs 95% previously) and the adjustment for the lease expiry profile of various malls. Further upside catalysts hinges on the acquisition of Changi City Point, which could be executed from CY2H13. Our new TP offers investors a total return of >10%.

READY FOR NEXT GROWTH PHASE

• Strong end to FY12
  
• Rental and occupancy rates to improve
  
• Asset injection may be on horizon
  

FY12 results in line with our projections

Frasers Centrepoint Trust (FCT) reported a strong set of 4QFY12 results yesterday. NPI grew by 13.7% YoY to S$28.7m, while distributable amount rose 21.8% to S$22.3m. DPU reached its record high at 2.71 S cents (+15.3%), partially boosted by a distribution of S$1.2m that was retained in 1HFY12. This was spot on with our 4Q DPU forecast but was ahead of street’s expectations. As a result, FY12 DPU amounted to 10.01 S cents, up 20.3%. This implies a decent yield of 5.3%.

Operating performance looks set to improve

Expectedly, the strong performance was driven by Causeway Point (CWP) following the substantial completion of the mall’s refurbishment and full-year contribution from Bedok Point. Positive rental reversion of 8.9% was also achieved during the quarter. As at 30 Sep, FCT’s portfolio occupancy was largely unchanged at 93.6% (93.7% in 3Q). Management reiterated that the asset enhancement initiative (AEI) at CWP is on track for full completion and is expected to reach full occupancy by Dec as the refurbished space on levels 5 and 7 are progressively leased out to tenants. In addition, average current passing rent is north of S$12.20, significantly higher than the rent of S$10.20 prior to AEI.

Maintain BUY with higher fair value of S$2.13

We also note that FCT’s financial position has strengthened. Gearing ratio improved to 30.1% from 31.3% a year ago (31.7% in 3Q), due mainly to an enlarged asset base and asset revaluation gain of S$100.7m (NAV up 8.5% YoY). We continue to like FCT for its pure suburban mall exposure and growth potential. Based on our understanding, the business park at One@Changi City may possibly obtain TOP by end-2012, while its retail mall occupancy may have already stabilized above 90%. Hence, we believe the injection of Changi City Point may likely happen in FY13, which should provide FCT with next level of growth. Maintain BUY with higher fair value of $2.13 (S$1.97 previously) as we update our model to incorporate firmer cap rates.

EXCELLENT GROWTH PROFILE

• Increased interest in Hektar REIT
  
• Expecting better distribution
  
• Operationally strong
  

Acquisition of Hektar REIT units

Frasers Centrepoint Trust (FCT) announced last Friday that it had increased its interest in Hektar REIT from 99.4m units (31.06%) to 124.9m units (31.17%). The rise in unitholding was pursuant to the provisional allotment of rights units to FCT under the one-for-four rights issue and allocation of excess rights units by Hektar REIT. As a reference, Hektar REIT had proposed the acquisitions of two retail mall properties, Landmark Central Property (LCP) and Central Square Property (CSP) for a total of RM181.0m, and the equity fund raising was done to partially fund the acquisitions.

Likely improvement in DPU by Hektar REIT

We are positive of this development as it presents FCT with greater opportunity to participate in the burgeoning retail market in Malaysia. Both malls are strategically located in areas with strong traffic catchment and offer good growth potential. According to Hektar REIT, the occupancy of LCP is likely to increase from 76.7% to 99.0% upon the commencement of tenancy by The Store on 15 Oct, while an intended refurbishment of CSP post acquisition is expected to enhance its rental rates. Hence, while the acquisitions are not expected to have any immediate material effect on FCT’s distributable income, we expect FCT to benefit from Hektar REIT’s repositioning and upgrading plans, and in turn an improvement in DPU going forward. As a note,

the NPI of both properties comprised ~18.9% of Hektar REIT’s FY11 NPI of RM58.3m, based on latest available figures. This is relatively sizeable in our view.

Maintain BUY

We also like FCT for its pure suburban exposure, strong execution and sturdy financial position. We believe FCT will continue to gain from strong rental uplift at Causeway Point and incremental income from Bedok Point. Operationally, FCT is expected to show improvement in portfolio occupancy and track positive rental reversions. We now factor in FCT’s increased interest in Hektar REIT and roll over our valuations to FY13, hence raising our fair value from S$1.89 to S$1.97. Maintain BUY.

Still looking attractive

• 3Q12 DPU of 2.6 Scts a record

• Operational performance stable; acquisition catalyst only in the medium term

• Maintain BUY, TP revised higher to S$1.93

Strong 3Q12. Topline and Net property income (NPI) of S$35.6m and S$24.7m were 30% and 32% respectively higher compared to a year ago. The strong y-o-y growth was well-balanced portfolio wide, underpinned by a 45% uplift in topline from Causeway Point post the intensive phase of its asset enhancement program coupled with a full quarter contribution from Bedok Point, which was acquired in 4Q11. Interest costs were lower at 2.75% post refinancing of existing short-term borrowings from recent MTN issues. As such, distributable income came in S$21.4m (boosted by S$1.2m that was retained in 1H12), translating to a record DPU of 2.6 Scts for the quarter.

Operational outlook stable. Portfolio occupancy remained steady q-o-q at 93.7% – the slight dip in occupancies at Causeway Point to 87.7% was compensated by higher occupancy rates from the reopening of a Food Court in Northpoint which saw occupancies head back up to 99.7%. Average reversions continue to remain positive at 2.7%-42.9%, with the higher end due to a single lease that was contracted at a significantly higher reversion rate. Average reversions in rental rates for 9M12 remained healthy at 12.5%. Looking ahead, we expect reversions to remain positive, underpinned by the progressive completion of AEI of Causeway Point by end of Dec’12.

Maintain BUY, TP raised to S$1.93. Stock remains attractive for its defensive earnings profile. Our TP is raised as we account for the better than expected performance of Causeway Point, lower interest cost and lower risk free assumption as we roll forward our numbers. FY13/14F yield of 5.8-5.9% remains attractive. Re-rating catalysts will hinge on the acquisition of Changi City Point.

STRONG GROWTH MOMENTUM

•Sterling quarter

•Strong rental reversions

•Asset injection likely in FY13

3QFY12 results exceeded expectations

Frasers Centrepoint Trust (FCT) turned in a good set of 3QFY12 results last evening. NPI was up 32.1% YoY to S$24.6m, while distributable income grew by 37.1% to S$20.2m. The strong performance was achieved mainly on the back of a 60.9% NPI growth by Causeway Point (CWP) and S$2.0m NPI contribution from newly acquired Bedok Point. For the quarter, DPU came in at 2.6 S cents (+33.3% YoY), partially boosted by distribution of S$1.2m which was retained in previous quarters. Together with 1HFY12 DPU of 4.7 Scents, 9MFY12 DPU totaled 7.3 S cents, forming 76.8% of our and consensus FY12 DPU projections.

Improved operating statistics

After dipping 4.0ppt in prior quarter, FCT’s portfolio occupancy as at 30 Jun improved marginally to 93.7%. The re-opening of the food court in May, we note, was the primary driver for the better number. This was somewhat offset by lower occupancy at CWP (down 3.6ppt QoQ to 87.8%) as refurbishment works commence on the fifth and seven floors. However, management reiterated that the asset enhancement initiative at CWP is in its final phase and that the mall is likely to be fully occupied when the project is completed in Dec 2012. Additionally, FCT continued to track positive rental reversions, where rental rates of new leases were 27.2% higher than preceding leases on average (2Q: +11.0%). This reflects continued strong demand for suburban retail space, in our view.

Retain BUY with higher fair value

Due to the better-than-expected results, we now re-jig our FY12-13 forecasts to reflect better occupancy and rental rates. This in turn raises our fair value from S$1.74 to S$1.89. We continue to like FCT for its pure suburban exposure, strong execution and sturdy financial position. We believe the injection of Changi City Point may happen in the next fiscal year, as its leases appear to have stabilized (though business park segment has yet to obtain TOP). This may provide potential for further DPU expansion. Maintain BUY.