Citi Research analyst Brandon Lee has kept his “buy” call on Frasers Centrepoint Trust J69U (FCT) following the REIT’s 3QFY2024 business updates analyst briefing.
In his July 24 note, the analyst notes that FCT is not seeing significant retail leakage to Johore currently with Causeway Points’ “resilient” sales performance and shopper traffic reaching pre-pandemic levels.
He writes: “FCT believes that the travel between Singapore and Johore is nothing new, with various modes of cross-border travel available, but what is new is the upcoming Rapid Transport System (RTS) Link Project which makes it easier for people to go into Malaysia and come into Singapore.”
The analyst adds that FCT believes that this will not be a zero-sum game, as expected leakages from RTS will be offset by Woodlands seeing more developments, such as new 10,000 HDB flats and a private apartment project.
Alongside FCT’s Causeway Point serving as a connecting hub of nodes, this could result in more traffic.
Additionally, the RTS Link Project could bring in more people from Malaysia to work in Singapore, leading to more transient people to work and help the overall market, a “big plus” in the analyst’s view.
Despite this, FCT continues to look at various aspects in terms of the potential impact to the retail market and is set to review its own assets from now until RTS completion to make adjustments to trade mix.
The REIT will also turn its focus onto more areas which can generate better traffic and work through tenant mix changes, as well as gaining an understanding of better retailers with both Malaysia and Singapore operations.
Additionally, Lee notes that the REIT’s 3QFY2024 rental reversion is currently on track and on the same trajectory as 1HFY2024, which saw an increase of 7.5%.
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This is despite a decline in tenant sales which dropped from a 4.3% y-o-y increase in 2QFY2024 to a 0.7% y-o-y increase in 3QFY2024.
Driven by a high-base, FCT expects existing occupancy costs of above 16% to normalise to a level of 16% - 18% due to the tendency of rental growth to lag tenants’ sales growth.
“Despite current tenants’ sales (including online) at 20% above pre-Covid level, FCT will always look at improving sales and will not stick to where it is today,” says Lee.
Meanwhile, on the FCT’s asset of NEX, the analysts note there have been no updates on its tax transparency as it is a process where all partners have to agree on the changes.
That said, NEX’s proposed asset enhancement initiative (AEI), the time-line, valued at $80 million - $100 million, is on track.
FCT is currently going through the process to achieve regulatory approval, which is required to ascertain how much it can do and amount of additional net lettable area (NLA).
“We think FCT may announce NEX’s proposed AEI following the September 2024 completion of Tampines 1’s AEI, as FCT’s idea is to complete one AEI first before rolling out another,” adds Lee.
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Overall, the analyst notes that FCT is “very positive” on NEX and is seeing better returns than its underwriting assumptions, in terms of overall performance and rent reversion.
On Central Plaza, an integral part of Tiong Bahru Plaza, FCT sees keeping it as a whole as important.
Central Plaza is currently trading well with positive reversions and an occupancy level of 91.4% in 3QFY2024, which is set to improve next quarter based on the REIT’s commitments.
Furthermore, in spite of proposed changes to gearing by the Monetary Authority of Singapore (MAS), as announced July 24, FCT has stated its plans to keep at its current gearing level of 39.1%, without pushing the limit of 50%.
Regarding the upcoming FY2024 estimates revaluation exercise, FCT does not expect any adjustment to cap rates, based on what it is seeing in the market and through its conversations with valuers.
However, it notes that valuation may increase due to higher rents and net profitsinterest (NPI).
Following the REIT’s recent tapping of the debt market at savings of 20 basis points, the analyst expects FCT’s debt cost to be maintained at around 4%.
The analyst’s target price of $2.51 is based on an average of the bank’s dividend discount model (DDM) and revised net asset value (RNAV) valuations at a weighted average cap rate of 4.5%.
Potential upside risks identified by the analyst include higher-than-expected rental rates on the back of stronger-than-anticipated economic growth or asset enhancement initiatives; a reduction in borrowing costs with the conclusion of the rate hike cycle; and higher-than-projected accretion from new acquisitions.
That said, a sharp decline in economic activity that could reduce demand for retail space, a sharper-than-expected recovery in interest rates and the risk of overpaying for future acquisitions are downside risks.
As at 2.53pm, shares in FCT are trading at 2 cents lower or down 0.91% at $2.17.
