CGS-CIMB Research is reiterating its “add” call on Frasers Centrepoint Trust (FCT) J69U with a higher target price (TP) of $2.62 from $2.59 previously.
While analysts Natalie Ong and Lock Mun Yee have shared that the higher TP was mainly due to a model update, which take into account higher and later-period distribution per unit (DPU), the analysts are still overall positive on the trust’s outlook.
FCT remains to be the largest suburban mall owner in Singapore. Adding on to its portfolio, FCT completed its acquisition of a 25.5% stake in NEX for a consideration of $340.0 million. The agreed property value translates to an entry NPI yield in the high 4% region, according to the analysts.
FCT’s sponsor Frasers Property Limited (FPL) TQ5 has a 24.5% effective stake in NEX, bringing its effective stake in NEX to 50%.
“The partial acquisition of NEX turns FCT into Singapore’s largest suburban mall owner and provides a potential acquisition pipeline for the REIT,” says Ong and Lock.
Based on the analysts’ 4.8% net profit income (NPI) yield and 100% debt funded assumptions, the acquisition results in a 1.0% decline in their FY2023 DPU due to the slight increase in share base from management fees paid in units. But on a full year-basis, the acquisition leads to a 0.7% accretion in their FY2024 DPU and 0.9% accretion for FY2025 DPU, fairly close to the proforma DPU accretion of 0.52% disclosed in the acquisition announcement on Jan 26.
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FCT's financial period ends in September.
Meanwhile, the analysts have forecasted gearing to reach 38.1% (after acquisition of additional 10% stake in Waterway Point) to 40.1%, translating to debt headroom of $600 million to reach 45% gearing level.
“While this level of gearing is high compared to FCT’s historical gearing level of about 33%, it is in line with majority of the SREITs in this present environment. FY2023 interest coverage ratio remains healthy at 2.8 times,” say Ong and Lock.
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On the other hand, FCT and FPL will be given executive committee (EXCO) board of director and EXCO working group representation due to their stake in NEX. “We are confident the management will be able to add value to NEX, possibly improving mall efficiency and profitability. This could come from cost savings due to bulk discounts from service providers and rejigging of tenant mix, in our view,” say the analysts.
Some re-rating catalysts include stronger-than-forecast reversions and acquisition of remaining stakes in Waterway Point and NEX, while downside risks include a slowdown in consumer spending, which may weaken tenant sentiment/leasing and impact FCT’s ability to achieve positive reversions.
As at 11.00am, units in FCT are trading at $2.28.
