Suburban still in fashion

FCT hit a record high quarterly DPU in 2Q12. In a somewhat atypical move, management guided for positive factors to help sustain its performance in 2H12. Backed by favourable retail tail winds and results from Causeway Point AEI this year, were main bullish.

2Q12/1H12 DPUs were broadly in line with our estimates and consensus, forming 27/51% of our full-year estimates. We raise DPUs to factor in stronger rentals and margins. Maintain Outperform with higher DDM-based target price (discount rate of 7.9% vs. 8.4% previously.

A good quarter

2Q12 NPI was up 30% yoy as a 1.7% pts improvement in NPI margins added to a 27% increase in top-line with higher occupancy at Causeway Point and rental reversions. Performance was good with 2Q12/ 1H12 DPUs up 21%/17% yoy and forming 27%/51% of our full-year estimates, despite higher retained earnings and more management fees paid out in cash (80% vs. expected 70%). Management has also, in a somewhat atypical move, guided for positive factors to help sustain FCT’s performance in 2H12. Occupancy at Causeway Point was at 91.3% as at end-2Q12 and is expected to trend around 90% for the rest of FY12. We expect any impact to be mitigated by retained earnings of S$2.3m in 1H12 (1H11: S$0.3m). Space under AEI is likely to have been fully pre-committed with management guiding for full occupancy on completion in Dec 12.

Positive rental reversions

Rental reversions strengthened to +11.0% over preceding leases vs. 1Q12’s +9.6%, aided by NorthPoint (+12.5%) and Yew Tee Point (+12.1%). While occupancy dipped to 92.5% from 99.7% at North Point due to a change in food-court operator, we are not overly concerned as we expect higher rentals for new leases given tight demand for space at the mall and the new foodcourt expected to be operational by May 12.

Potential interest savings

We expect some interest cost savings when FCT refinances its S$75m MTN (14% of total debt) in Jun 12, given a fairly high cost of 4.8%. Asset leverage remains a fairly healthy 31%.

Frasers plans record DPU as Q2 gain soars

FRASERS Centrepoint Trust (FCT) is paying its highest ever distribution per unit (DPU) after second-quarter earnings beat forecasts on the back of additional revenue from Bedok Point and refurbished Causeway Point malls.

"We have achieved another quarter of strong growth," Frasers chief executive Chew Tuan Chiong said in a statement.

"The asset enhancement of Causeway Point and the acquisition of Bedok Point are delivering sustainable income growth that helps drive higher DPU for our unitholders. FCT is also benefiting from higher rental rates achieved from new and renewed leases. We expect these positive factors to sustain FCT's performance through the second half of this year."

Frasers, a retail real estate investment trust (Reit), reported net income of $18.8 million in the second fiscal quarter ended March, up 46.2 per cent from the year-ago period.

GOOD START TO FY12

•Results within expectations

•Strong operational performance

•Asset enhancements and acquisitions likely to drive growth

Sturdy results as expected.

Frasers Centrepoint Trust (FCT) reported NPI of S$24.9m (+33.6% YoY) and distributable income of S$19.7m (+31.3% YoY) for 1QFY12, supported by strong uplift from Causeway Point (CWP), full-quarter contribution from Bedok Point and positive rental reversions. The results were consistent with our estimates, with headline numbers forming 23.5-26.7% of our full-year forecasts. We note that ~S$1.6m (c.0.2 S cents) will temporarily be retained, resulting in a quarterly DPU of 2.2 S cents (+12.8% YoY). This will be paid on 29 Feb 2012, together with DPU of 0.28 S cents announced in Oct 2011.

Demand for malls still strong.

Except for Bedok Point whose occupancy was unchanged at 98.3%, all four other malls in FCT’s portfolio continued to register improvements in their occupancies over the quarter. This brought the overall portfolio occupancy to 97.5%, up from 95.1% in prior quarter. In addition, positive rental reversions of 9.3-11.2% (average 9.6% vs. 7.9% in 4QFY11) were seen across its portfolio properties, reflecting still healthy demand for its malls.

Maintain BUY.

Going forward, FCT believes that its portfolio performance is expected to remain stable, with positive growth in overall rental reversions likely in the coming months. Management also guided that the refurbishment works at CWP, now 80% completed, is on track for full completion by Dec 2012. While occupancy is projected to dip slightly from 95.5% to 90% during this phase of work, the impact to rental income is likely to be limited in our view, since it involves mainly the higher levels and mall’s facade. We continue to like FCT for its pure exposure to suburban malls and its growth potential. With the impending completion of the asset enhancement initiatives at CWP, we believe FCT may be more active in seeking investment opportunities to drive growth, possibly asset injection from pipeline or third-party assets. Maintain BUY with unchanged S$1.68 fair value on FCT.

Festive cheer

Stronger rental reversions and occupancy characterised 1Q12.Backed by resilient suburban retail exposure and a refurbished Causeway Point, FY12 looks like another strong year.

1Q12 DPU meets consensus and our estimates, at 24% of our FY12 estimate notwithstanding retained earnings of S$1.6m. We keep our DPU estimates and DDM-based (disc. rate: 8.4%) TP. Maintain Outperform.

Festive cheer

We expect a strong FY12 on the back of improved occupancy at Causeway Point, with refurbished space progressively coming on stream. 1Q12 NPI was flat qoq as a higher topline was negated by higher operating expenses. Broad trends appear favourable for FCT. Rental reversions were strong at 9.6% over preceding rates (4Q11: 7.9%), led by Northpoint and Causeway Point. Occupancy at all malls except newly-acquired Bedok Point improved, up 2.4% pts overall to 97.5%.

Causeway Point on track

To allow tenants to tap the festive season, we believe that some renovation work had been pushed back at Causeway Point, resulting in a higher 96% occupancy in 1Q12 and in part a 15% increase in NPI qoq. Occupancy should dip to about 90% after Chinese New Year as FCT embarks on its next phase of work. The impact, however, will not be major since work will be on the higher levels (where rentals are lower) with the progressive commencement of business in the refurbished sections. With 80% of the work completed, AEI is on track for completion by end-2012.

Cost of borrowing should drop

Cost of borrowing crept up to 3.1% from 3.0% after FCT refinanced its short-term acquisition facility with a secured loan at a fairly attractive margin of 85bp. We expect interest cost savings when it refinances its S$75m MTN (14% of total debt) in Jun 12, given a high cost of 4.8%. Asset leverage remains a healthy 31%.

Strong uplift from Causeway Point

Record high DPU. Frasers Centrepoint Trust (FCT) announced 4QFY11 DPU of 2.35 S cents, representing an 8.8% YoY and 20.5% QoQ increase. This is the highest-ever quarterly DPU paid out, and surpassed both our and consensus forecasts. Coupled with 9MFY11 DPU of 5.97 S cents, full year DPU amounted to 8.32 S cents, or 5.8% ahead of our estimates (2.7% above consensus). This translates to a 5.7% DPU yield.

Strong performance from Causeway Point. The solid performance, we note, was achieved on the back of strong performance upswing from Causeway Point (CWP), following the re-opening of refurbished sections. This lifted FCT’s quarterly gross revenue and NPI to S$34.1m (+5.1% YoY) and S$25.3m (+13.7% YoY) respectively. Management shared with us that 65.5% of the refurbished works at CWP had been completed, and the asset enhancement initiative (AEI) is on track to fully complete in Dec 2012. With next phase of work to shift to the higher levels, we expect the disruption to revenue to be more muted.

Healthy financial and operating statistics. FCT’s financial position as at 30 Sep remained at a healthy level of 31.3% (vs. 31.7% at end-3Q) in spite of a 15.3% QoQ increase in total debt, helped by portfolio revaluation gain of S$97.2mn. The average rental rate for renewal leases signed in 4Q was also 7.9% higher than the preceding leases. In addition, its portfolio occupancy improved from 87.6% in 3Q to 95.1%, boosted by sharp recovery in occupancy at CWP from 78.3% to 92.0% in the same period.

Positive outlook. Going forward, we believe FCT will continue to post significant growth in its rental income as the full contribution of CWP and newly-acquired Bedok Point has yet to be realized. According to management, CWP is expected to provide over 20% increase in NPI when the AEI is completed, while its occupancy rate is likely to stay above 90% throughout. Bedok Point, on the other hand, is likely to add S$7m to FY12 NPI.

Upgrade to BUY. We raise our FY12 forecasts by 3.3-8.3% to factor in the latest results and lower cost of debt. We also introduce our FY13 estimates and roll over our RNAV-based valuation to FY12. Consequently, our fair value is now raised from S$1.57 to S$1.68. We turn positive on FCT as its suburban malls are likely to remain relatively resilient even in times of market uncertainty. We also like its strong execution and steady pipeline of assets from its sponsor. Upgrade from Hold to BUY.