While there were no financials disclosed in Frasers Centrepoint Trust’s (FCT) business update for the 1QFY2021 ended December, analysts from CGS-CIMB Research, PhillipCapital, Maybank Kim Eng and UOB Kay Hian are encouraging investors to continue to accumulate units in the trust.
CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee have maintained “add” on FCT with a higher target price of $3.01 from $2.89 as they view the trust’s 1Q updates to reflect an “encouraging quarter amid uncertainties”.
On Jan 21, FCT reported improved occupancy rate across all its assets q-o-q to 90.7% to 98.7%, with an overall portfolio occupancy of 96.4% during the quarter.
1QFY2021 rental reversion also remained relatively flat, which, to Eing and Lock, is “encouraging”.
The trust also reported that its total tenant sales remained stable at near pre-Covid-19 levels.
While trades such as the supermarket, healthcare, luxury, electronics and home furnishing are doing better, there was polarisation in the food and beverage (F&B) and fashion sectors in the 1QFY2021.
On this, Eing and Lock “expect gradual recovery in shopper traffic as capacity eases and as office crowd returns, supporting tenant sales post the year-end festive season”.
The analysts are also positive on FCT’s divestment strategy, where the trust will be focusing on larger malls. FCT, in September 2020 divested one of its smaller malls, Bedok Point at a “good 2-2.5% net property income (NPI) yield based on FY2019/FY2020 NPI”. It is also in the midst of divesting Anchorpoint at 2.7% to 3.5% NPI. The divestment will be completed on March 22.
“Given its now larger asset under management (AUM), the REIT’s strategy is to focus on larger malls (more than 120,000 sqft),” note the analysts.
After factoring the divestment of Anchorpoint, Eing and Lock have reduced their distribution per unit (DPU) estimates for FY2021 to FY2022 by 2-3%.
SEE: Frasers Centrepoint Trust says 53.6% of NLA allocated to essential services in 1Q business update
“We continue to like FCT as a pure suburban mall landlord in Singapore. The enlarged portfolio would further enhance its income resilience. We expect FCT to continue to deliver a faster recovery than its peers. Upside/downside risks include faster/slower recovery from Covid-19 impact,” they say.
For PhillipCapital analyst Natalie Ong, FCT’s results came in as a “positive surprise” with some of its malls outperforming her expectations.
On that, Ong has maintained “buy” on FCT with a higher target price of $2.93 from $2.79 for lower beta and cost-of-equity assumptions.
Ong has lowered beta to 0.65 from 0.7 to reflect FCT’s “stability of assets”.
“As a result, cost of equity drops from 6.75% to 6.38%. Stock catalysts expected from growth in catchments surrounding FCT’s malls and synergies after ARF acquisition,” she says.
Echoing Eing and Lock’s sentiments on FCT’s improved occupancy, Ong has also zoned in on FCT’s lease renewals, saying that they “were on track” despite a weaker leasing environment.
“About 29.6% of leases by gross rental income (GRI) remain for FY2021. Expiries will mostly fall in 3QFY2021 or 4QFY2021, which should give consumer spending and tenant confidence some time to recover,” she says.
That said, the uncertain timeline for the lifting of restrictions on atrium space may impact FCT negatively, as sales and promotions held at FCT’s atriums help boost sales for its participating tenants, which have a bearing on gross turnover rents.
As portfolio occupancy levels have recovered to close to pre-Covid-19 levels, Ong believes the worst is over for FCT.
“Suburban retail remains in demand, supported by increased weekday catchments from hybrid work arrangements. FCT’s malls, which are located near household catchments and within one to three minutes from transportation nodes, are expected to benefit from both stay-home-workers’ shopping and the transient office crowd,” she says.
“We believe they will be among retailers’ top priorities when the latter review their consolidation plans. As such, we remain optimistic on FCT’s leasing,” she adds.
Under Singapore’s newly-introduced ReAlign Framework, Ong highlights that small businesses will be able to enjoy a six-week “notice of negotiation” period with landlords.
The six weeks will run from Jan 15 to Feb 26.
“Tenants who wish to renegotiate their leases will have to submit notice of negotiation on their landlords. Long-term viability of tenants will be a key consideration,” she says.
“We think that FCT will try to retain tenants that complement its malls’ trade mix, while negotiating swift exits for struggling tenants. FCT’s manager shared that some tenants are still cautious, preferring to delay renewing until the last minute or preferring shorter leases. We understand that although lease terms are largely unchanged, the manager has offered short renewals to about 5% of mall tenants.”
“After raising occupancy assumptions and accounting for the divestment of Anchorpoint, we lower FY2021/2022 NPI by 1.6%/2.8%. FY21e/22e DPUs are 1.3%/0.5% higher due to lower debt assumptions,” she adds.
Ong also expects that some 75% of FCT’s divestment proceeds from Bedok Point and Anchorpoint will be used to pay off FCT’s debt.
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“We also assume that few units would be issued for the portion of management fees payable in units due to the recovery in its share price.”
Maybank Kim Eng’s Chua Su Tye has also maintained “buy” on FCT with the same target price of $2.90.
Citing the same reasons such as FCT’s resilient occupancy rates and stable operating metrics, Chua says he is keeping his forecasts unchanged.
Chua adds that suburban malls, which make up FCT’s portfolio, will lead the retail sector recovery in Singapore’s phase three of reopening.
On the flat rental reversion reported in 1QFY2021, Chua says he expects “lease negotiations [for FCT] to be more protracted and for reversions to be neutral or slightly negative in FY2021”.
Chua also views FCT’s balance sheet to be “sound”.
“FCT completed the acquisition of ARF, which doubled its assets under management (AUM) to $6.7 billion. The quarter also saw active asset recycling with the divestments of Bedok Point at $108 million to its sponsor for redevelopment, and Anchorpoint at $110 million to unrelated third parties,” he says.
“The latter is expected to be completed by end-March 2021. Its leverage rose q-o-q from 35.9% to 37.7% from the ARF transaction, but the cost of debt has eased 20bps to 2.2%. We estimate debt headroom at SGD1.4b (at 50% limit),” he adds.
UOB Kay Hian Research analyst Jonathan Koh has, likewise, maintained "buy" on FCT with a slightly higher target price of $3.18 from $3.15 previously as the REIT demonstrated "resiliency" due to its suburban malls.
Koh has also upped his DPU forecast for FY2021 by 1.6% to 13.7 cents due to the REIT's lower cost of borrowings.
Seeing its suburban mall portfolio as a positive, Koh also sees a gradual but steady recovery in shopper traffic and tenant sales, accompanied by the progressive easing of social distancing measures, a boon for the REIT.
He adds that the acquisition of FCT's remaining 60% stake in Waterway Point by its sponsor Frasers Property is another share price catalyst for the counter.
Units in FCT closed 2 cents higher or 0.8% up at $2.61 on Jan 25.
