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Analysts positive on FCT amid improving portfolio performance

Chloe Lim
Chloe Lim11/1/2022 01:26 PM GMT+08  • 4 min read
Analysts positive on FCT amid improving portfolio performance
Waterway Point, one of the malls under FCT's portfolio. Photo: Albert Chua/The Edge Singapore
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Analysts are generally positive on Frasers Centrepoint Trust (FCT) following its results for the FY2022 ended Sept 30.

DBS Group Research analysts Geraldine Wong and Derek Tan have kept their “buy” call on FCT in lieu of resilient offerings that continue to support a “rosy report card”, driven by strong above-market average operational metrics.

The analysts say that FCT’s full year gross revenue of $356.93 million up 4.6% y-o-y was in line with their estimate of $358.5 million.

Net property income (NPI) for the full year was $258.60 million, up 4.9% y-o-y and distributable income was at $208.19 million, up 1.7% y-o-y. “Full year NPI of approximately 72% was comparable on a y-o-y basis, factoring in higher marketing expenses and higher property tax and maintenance expenses this year,” say Wong and Tan.

Correspondingly, FCT’s FY2022 distribution per unit (DPU) of 12.227 cents up 1.2% y-o-y was below, post income retention of $1.7 million in 2HFY2022.

Additionally, Wong and Tan observe that FCT continues to report strong tenant sales, where on a full-year basis, portfolio tenant sales rose 11.3% y-o-y, while shopper traffic rose 12.4% y-o-y, outperforming peers on several fronts.

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For 9MFY2022, tenant sales averaged at about 110% of pre-Covid-19 levels, with shopper traffic currently hovering at approximately 80% of pre-Covid-19 levels.

Portfolio committed occupancy rose 0.40 percentage points (ppt) q-o-q to 97.5% as well, with a tenant retention rate of 82%.

“With occupancy costs of 16.2% for FY2022 below pre-Covid-19 levels of 16.6%-17.0%, we see further rental upside to be unlocked in the coming years, with more room for reversionary rents to rise,” says the analysts.

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At the same time, FCT’s ancillary income, which typically contributes approximately 3% to the topline revenue, was below pre-Covid-19 levels. “Only three to four months’ worth of atrium sales income was shown in FY2022 financial numbers, and we expect to see a full year contribution of atrium rental income in FY2023,” Wong and Tan add.

However, the analysts have lowered their target price to $2.60 from $2.90 previously as they roll forward their valuations into FY2023 while pricing in higher interest rate assumptions in FY2023 and FY2024.

“Our discounted cash flow valuation factors in a 3.5% risk free rate, 0.70 beta, 6.2% weighted average cost of capital (WACC), and 2.5% terminal growth to derive a new target price of S$2.60. We have not factored in acquisition assumptions in our model,” they write.

CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong have kept an “add” rating on FCT with a lowered target price of $2.48 from $2.75 due to higher risk-free/cost of equity (COE) assumptions.

At this stage, FCT’s continues to recover steadily, where FY2022 reversions came in at 1.5% higher, the analysts point out.

Five out of FCT’s nine malls currently display an occupancy of above 99%. Lock and Ong note that three of its assets continue to lag in recovery however, Changi City Point continues to be impacted by reduced footfall in the Expo/Changi business park area, while backfilling is in progress at Century Square and Central Plaza, following the exit of mini-anchor tenants.

“Going forward, we expect NPI margins to remain healthy albeit marginally lower y-o-y as built-in rental escalations and full-year operations of atrium space, which typically contributes approximately 3% to revenue, should mitigate higher utility costs,” Ong and Lock write.

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The analysts also note that all-in cost of debt increased marginally from 2.2% in FY2021 to 2.5% in FY2022, while interest rate hedge improved from 56% to 71%.

“Leverage dipped q-o-q from 33.9% to 33.0% but is expected to increase to c.35% post-acquisition of the additional 10% stake in Waterway Point in mid-1QFY2023,” they add.

Management articulated its disciplined approach towards portfolio reconstitution in light of the volatile macroeconomic environment and will evaluate acquisitions and divestments on a case-by-case basis.

“We introduce our FY2025 and tweak our FY2023 and FY2024 DPU by -2.1% and 1.3% respectively as we pencil in the acquisition of the additional 10% stake in Waterway Point, assuming a loan-to-value ratio (LTV) of 100% and mid-1QFY2023 completion for the acquisition, as well as peaking interest cost and utility expenses in FY2023,” say Lock and Ong.

As at 12.36pm, units in FCT are trading at 2 cents up or 0.96% higher at $2.10 at an FY2023 P/B ratio of 0.89x and dividend yield of 6.05% according to CGS-CIMB’s estimates.

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