RHB Bank Singapore's Vijay Natarajan has maintained his "neutral" call on Frasers Centrepoint Trust J69U , but with a slightly raised target price of $2.15 from $2.13.
FCT, as part of its portfolio pruning, cut its stake in Hektar REIT. This divestment follows its recent sale of Changi City Point for $338 million announced on Aug 30.
The way Natarajan sees it, the management is making the right moves as it is "further crystalising" its strategy of recycling non-core assets to reduce gearing. "This allows FCT to position itself for the right opportunities to increase stakes in newer dominant malls," writes the analyst in a Sept 26 note.
On 22, FCT announced the divestment of 143.9 million Hektar REIT units, equal to 29%, for RM128.1 million. This will leave FCT with just 10.6 million units, which will be sold off at a later date.
At RM0.89, the selling price is a 48.3% premium to Hektar's Sept 22 closing price but a 27% discount to its book value and 10% discount to FCT’s carrying value.
FCT first bought into Hektar back in May 2007 when the latter went IPO. It paid $46.6 million for a 27% stake.
From the sale, FCT will be booking net proceeds of $37.1 million and together with proceeds from Changi City Point, bring its gearing to below 37% level.
With this, Natarajan believes FCT will have a debt headroom to add an additional 10% stake in Nex mall from 25.5% now, which will cost around $210 million, without tapping into the equity market.
Further down the road, the analyst believes that FCT could potentially divest its stakes in Century Square mall and Central Plaza office.
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Meanwhile, FCT is seeing some operational improvements. Natarajan, citing RHB's economists, expects retail sales momentum expected to pick up in Q4, aided by seasonal events, resilient domestic demand, and front-loading of consumer demand in anticipation of a GST rate hike from 8% to 9% in Jan 2024.
This trend will help lift tenant sales at FCT's malls, which were already 16% higher on average above pre-pandemic levels, and thereby, help FCT achieve low- to mid-single digit positive rent reversions.
His new target is derived after taking into account a 1% dip in distribution per unit for FY2024 and FY2025, interest costs and lower cost of equity assumptions by 5bps after factoring in a healthier balance sheet.
Natarajan notes that at current unit price of 0.9x book value and 6% yield, FCT's valuation is not compelling and therefore his 'neutral' call. "We continue to recommend unitholders to buy on dips."
