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Analysts mixed on FCT's acquisition of 25.5% stake in Nex

Felicia Tan
Felicia Tan • 7 min read
Analysts mixed on FCT's acquisition of 25.5% stake in Nex
The interior of Nex. Photo: Mercatus
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Analysts are mixed on Frasers Centrepoint Trust’s (FCT) acquisition of a 25.5% stake in Nex, with Citi Research and RHB Group Research remaining “neutral” on the counter. OCBC Investment Research is also keeping its “hold” call.

Other brokerages like DBS Group Research and CGS-CIMB Research are more positive, keeping their “buy” and “add” calls following the acquisition. PhillipCapital has also kept its "accumulate" call albeit with a lower target price.

On Jan 26, Mercatus Co-operative announced that it divested its 50% indirect stake in the suburban mall to a 51/49 joint venture (JV) by FCT and its sponsor, Frasers Property. The divestment was made for a consideration of $652.5 million.

Despite his “neutral” call, Citi analyst Brandon Lee called the acquisition a “pleasant surprise” as he thought that any potential sale would occur in the “medium-to-long term” instead.

“Although the transaction is neither big nor small ([at around] 9% of FCT’s AUM) and DPU-accretion is benign, we think buying a 25.5% stake is the only way FCT can generate DPU-accretion without raising expensive equity and keep gearing [under] 40%, with the remaining 24.5% stake adding to its existing sponsor pipeline of Northpoint City South Wing,” he writes in his Jan 26 report.

AUM stands for assets under management while DPU stands for distribution per unit.

See also: Mercatus divests 50% indirect stake in Nex for $652.5 mil

He adds: “the earlier divestment of three aged assets at 1.9%-3.8% and redeploying into higher-yielding Nex (and 10% stake in Waterway Point earlier at 4.5%) also points to FCT’s good portfolio reconstitution strategy”.

“Overall, we view the transaction as neutral given mild DPU-accretion and higher gearing limiting future acquisitions,” he continues.

Lee has kept his target price at $2.13. The analyst values FCT’s properties at a weighted average cap rate of 4.7% for its revised net asset value (RNAV).

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In a separate report issued on the same day, Lee noted that FCT’s rising debt cost is “something to watch”. The REIT’s business updates for the 1QFY2023 revealed that its debt cost stood at 3.5%, slightly higher than the analyst’s FY2023 estimate of 3.44%. The REIT’s gearing also rose by 0.9 percentage points q-o-q to 33.9% even though its gearing is still one of the lowest among the Singapore REITs (S-REITs) among Citi’s coverage.

While the REIT’s newly-announced asset enhancement initiative (AEI) at Tampines 1 is a testament to the manager’s proactive plans to improve the mall’s operational performance in the medium-term, Citi’s Lee remained “neutral” on valuations. He adds that he sees better value in its peer, Lendlease Global Commercial REIT (LREIT).

RHB Group Research analyst Vijay Natarajan has upped his target price estimate to $2.10 from $2.09. Like his peer at Citi, Natarajan thought that the deal was a “pleasant surprise” albeit at a “tight pricing”.

“Overall, we are neutral on the deal – while we like the long-term strategic fit and synergies, tight pricing and high funding costs limits yield accretion,” says the analyst in his Jan 30 report. “Operating metrics continue to trend higher, but FCT’s short debt maturity and low debt hedge versus that of comparable peers will negate most of the gains moving forward.”

With a post-acquisition gearing of 38.5%, the analyst foresees that the REIT may explore potential divestment opportunities and also possible equity-raising at the right opportunity to shore up its balance sheet.

For the REIT’s 1QFY2023 business update, Natarajan notes its improving operating metrics, which were otherwise negated by a sharp rise in interest costs.

The analyst has lifted his DPU estimates for the FY2023 to FY2025 after factoring in the acquisition and funding costs.

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“FCT’s environmental, social and governance (ESG) score of 3.2 out of 4.0 is two notches above the country median, so we apply a 4% premium to its intrinsic value to derive our target price,” he says.

The research team at OCBC has lowered its fair value estimate to $2.28 from $2.36 previously after FCT’s business update and acquisition news.

Like its peers, the team noted FCT’s “solid and resilient operating metrics” but stood concerned at the jump in its average cost of debt.

The team has also cut its DPU forecasts for the FY2023 and FY2024 by 4.3% and 4.5% respectively on higher borrowing cost assumptions. The team has not factored in the proposed acquisition of Nex in its model.

“Looking ahead, we expect FCT to largely benefit from Singapore’s reopening, and also like its defensive positioning given expectations of an economic slowdown and possible recession in some developed countries. However, the spike in borrowing costs and FCT’s relatively large debt maturities from FY2023 to FY2025 would likely exert downward pressure on its DPU,” writes the team on Jan 30.

Nex acquisition a plus

Meanwhile, DBS analysts Geraldine Wong and Derek Tan are positive on the Nex acquisition, seeing the REIT as “fortressing [its] Suburban King title”. In addition to their “buy” call, Wong and Tan have kept their target price at $2.60, the highest among the brokerages.

To the analysts, the capture of the 50% share of Nex came as a “pleasant surprise”, calling the deal “accretive [and a] sizeable acquisition”.

They add that the deal added a “new trophy asset to the FCT name”.

“[FCT’s] sponsor’s support to the deal continues to be a testament of support for FCT’s growth while fortressing the suburban king title. Post-completion, FCT will overtake CapitaLand Integrated Commercial Trust (CICT) to be the largest suburban shopping centre owner in Singapore, with potential to grow further through unwinding the additional stakes in Nex mall and Waterway Point,” they write.

Referring to FCT’s 1QFY2022 business update, the analysts see the REIT’s “resilient suburban offering” as continuing to support a “rosy report card, driven by strong above-market average operational metrices”.

“Delivery of a yield accretive acquisition, with sponsor Frasers Property lending support, will remove the overhang of a potential equity fund raising for the stock,” the analysts write.

They add that FCT’s portfolio continues to outperform its peers on several fronts, with tenant sales at around 10% above pre-Covid levels, and unscathed by both the return to office trend and broader border reopening.

“With occupancy cost of 16.2% for FY2022, below pre-Covid levels of 16.6% - 17.0%, we see further rental upside to be unlocked in the coming years, with room for reversionary rents to rise,” they continue.

That said, the analysts acknowledge that they are “more positive” on FCT than their peers on the prospects of retail and its long-term integration into the retail ecosystem.

CGS-CIMB analysts Lock Mun Yee and Natalie Ong are also positive on FCT’s higher retail occupancy and positive reversion as reported in its 1QFY2023 business update.

In addition, the analysts stood positive on the acquisition of Nex, saying that the stake has renewed FCT’s inorganic growth prospects. “Suburban retail malls will remain resilient, in our view,” they write in their Jan 30 report.

While the analysts have upped their target price to $2.59 from $2.48 on lower cost of equity (COE) and beta assumptions, they have also cut their DPU estimates for the FY2023 to FY2025 to factor in higher borrowing costs. They have not factored in the acquisition of the 25.5% interest in Nex pending deal completion.

“Re-rating catalysts include stronger-than-forecast reversions and acquisition of remaining stakes in Waterway Point and Nex. Downside risks include a slowdown in consumer spending, which may weaken tenant sentiment/leasing and impact FCT’s ability to command positive reversions,” they write.

PhillipCapital analyst Darren Chan sees the acquisition as being a "good strategic fit" to FCT's portfolio. "[Nex] is one of the largest suburban retail malls in Singapore with excellent connectivity to public transport. It also has a committed occupancy of 99.9% and a remaining lease period of 85 years," he notes.

However, the analyst lowered his DPU estimates for the FY2023 to FY2025 by 6% to 8% after factoring in the Nex acquisition and higher borrowing costs. His target price has also been lowered to $2.31 from $2.38 previously.

Units in FCT closed 2 cents lower or 0.89% down at $2.22 on Jan 30.

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