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Analysts mixed on FCT's performance after 3Q21 update

Felicia Tan
Felicia Tan7/26/2021 10:52 PM GMT+08  • 6 min read
Analysts mixed on FCT's performance after 3Q21 update
Analysts from CGS-CIMB and RHB think that FCT's Central Plaza could be a potential candidate for divestment.
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Analysts from CGS-CIMB Research, DBS Group Research, Maybank Kim Eng, OCBC Investment Research (OIR), PhillipCapital, RHB Group Research and UOB Kay Hian are mixed on Frasers Centrepoint Trust (FCT) after the release of its 3QFY2021 business update on July 22.

For the 3QFY2021, FCT saw shopper traffic fall to around 60% of pre-Covid-19 levels during the Phase 2 (Heightened Alert) measures from May to June.

During the period, it also reported stable occupancy at 96.4% with a weighted average lease expiry (WALE) of 1.62 years by net lettable area (NLA).

CGS-CIMB’s Eing Kar Mei and Lock Mun Yee have kept “add” on the REIT with a higher target price of $2.91 from $2.87 previously.

They have kept their distribution per unit (DPU) forecasts for the FY2021 to FY2023 as well.

To Eing and Lock, FCT, with its healthy gearing of 33.9% and large debt headroom, is ready for any suitable acquisition when it comes along.

“While Central Plaza (the only office asset in the portfolio) forms an immediate catchment for Tiong Bahru Plaza, we think a Central Plaza divestment could happen with the right offer,” the analysts write in a July 23 report.

To be sure, “we continue to expect FCT to outperform its peers in operating metrics given its pure focus on suburban malls,” they add.

Re-rating catalysts include accretive acquisitions and better-than-expected rental reversions while downside risks include more Covid-19 restrictions.

DBS's Geraldine Wong and Derek Tan have maintained "buy" on the REIT with the same target price of $3.

The target price is based on discounted cash flow (DCF) valuation, which factors in a 2.0% risk-free rate, 0.75 beta, 6.0% weighted average cost of capital (WACC) and 2.5% terminal growth.

"We have not factored in further acquisition assumptions in our model," write the analysts.

To them, FCT's portfolio of suburban malls remains "well-anchored" against the tightening measures.

"Fears of rental relief impact have shrouded the retail REITs sector, though downside risks may have been over-estimated," they write. "We adjust our DPU down by 4% to 12.15 cents as we price in one month of rental waivers, which helps maintain a 34% y-o-y growth in DPU."

Maybank Kim Eng’s Chua Su Tye has kept “buy” on FCT with an unchanged target price of $2.90.

To him, the REIT’s portfolio occupancy was “resilient”, and while rental reversion was “flattish”, it should improve as tenant sales gain traction in the FY2022.

Chua adds that he continues to see suburban malls leading the recovery in the retail sector in Singapore’s long reopening phase, “with stable operating metrics for its more sizeable suburban malls portfolio underpinning DPU visibility”.

To this end, Chua has kept the rest of his forecasts unchanged, with FCT remaining one of his top picks among the S-REIT sector.

With its sound balance sheet, Chua thinks that “further asset recycling is likely, especially as management looks towards increasing yield on its larger malls”.

The team at OCBC Investment Research has also kept “buy” on FCT with an unchanged target price of $2.78.

On the back of the REIT’s results, the OCBC team says it expects to see a “firm recovery” in the FY2021. It adds that FCT’s portfolio of suburban malls in Singapore are “relatively more defensive and resilient” in nature given their dominant positions in their respective catchment areas.

“The addition of the PGIM ARF portfolio on a 100% basis has also boosted FCT’s scale and profile within the Singapore retail landscape,” writes the team.

That said, with the tighter Phase 2 (Heightened Alert) measures, the OCBC team has lowered its DPU forecasts for the FY2021 and FY2022 by 2.8% and 2.1% respectively, as they’ve factored in rental rebates in its assumptions.

PhillipCapital’s Natalie Ong has also maintained “buy” on the REIT albeit with a lower target price of $2.87 from $2.88.

She has also reduced her DPU estimate for the FY2021 by 7.5% after accounting for the $25,000 in rental rebates for tenants over May to August.

To Ong, FCT is underappreciated by investors for its suburban retail assets and with 45% of its tenants in essential services such as supermarkets.

The REIT, according to Ong’s estimates, currently trades at 5.1%, 5.8% yields for the FY2021 and FY2022 respectively.

“Sustained reopening visibility will support leasing and rental growth, in our view. FCT’s portfolio of well-located suburban malls are expected to draw a disproportionate share of leasing demand,” she writes.

Catalysts include asset enhancement initiatives (AEIs), acquisitions from its sponsor’s pipeline of assets, increasing its stake in Waterway Point or acquiring or partnering companies with only one mall in its portfolio.

UOB Kay Hian’s Jonathan Koh has kept “buy” on FCT with an unchanged target price of $3.06.

He has also maintained his existing DPU forecast.

Koh remains positive on FCT for its defensive distribution yield of 5.5% for the FY2022, its well-located suburban malls that is close to dense population catchments.

FCT’s malls also cater to essential services and non-discretionary spending, he notes.

To him, the re-introduction of the Phase 2 (Heightened Alert) measures is only a temporary setback for the REIT.

FCT is also ready to act on its next acquisition when the opportunity next presents itself as it has the financial capacity to do so.

A catalyst identified by Koh is a gradual but steady recovery in shopper traffic and tenant sales, accompanied by the progressive easing of social distancing measures.

The acquisition of Northpoint City South Wing from its sponsor Frasers Property could also be another catalyst for the counter.

RHB’s Vijay Natarajan is the only analyst to maintain his “neutral” call on the REIT. Natarajan has also kept his target price of $2.40 unchanged.

While he views the REIT’s 3QFY2021 metrics as “stable”, he views its near-term outlook as “challenged” with Singapore returning to the tightened measures till August.

He has also cut his DPU estimate by 3% for the FY2021, factoring in rental rebates.

“With acquisition-led growth priced in and more negative news flow expected on the retail sector, we see no strong share price catalysts,” he writes.

“FCT’s valuation is fair at 1.1 times price-to-book value (P/BV),” he adds.

FCT’s gearing is currently the lowest among the large-cap S-REITs, notes Natarajan.

He also expects Central Plaza – currently the only office asset in its portfolio – as a possible candidate for divestment.

On acquisitions, Natarajan believes Waterway Point and Northpoint City South Wing “could have potential for injection into the REIT”.

Units in FCT closed 2 cents lower or 0.8% down at $2.36 on July 26, or 1.02 P/NAV, according to PhillipCapital’s estimates.

Photo: FCT

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