SINGAPORE (Apr 14): OCBC Investment Research is keeping its “buy” recommendation on Frasers Centrepoint Trust (FCT), but with a lowered target price of $2.23 from $3.07 previously.

Although FCT has been delivering positive DPU growth every year since it listed in July 2006, with a CAGR of 5.5%, this track record may be broken in FY20 due to unprecedented measures introduced by the Singapore government to tackle the Covid-19 impact.

FCT owns suburban malls in Singapore, which have historically been more defensive and resilient in nature given their dominant positions in their respective catchment areas.

In a Monday report, OCBC believes that there is an overhang in FCT’s near-term outlook from the Covid-19 (Temporary Measures) Bill, which is aimed to provide temporary relief to businesses and individuals who are not able to fulfil their contractual obligations due to COVID-19.

Tenants with leases at non-residential immovable property are allowed to defer their rental payments for six months for contracts which were entered into or renewed before Mar 25 (may be extended, for up to a year if necessary), without fear of legal action.

On the back of this, the Ministry of Law will set up a panel to resolve disputes and will have the final say on the outcome. However, tenants must show that their inability to pay rent is to a “material extent” caused by a Covid-19 event. Tenants who are able to pay their rents will not qualify.

“Although the Bill appears onerous on a landlord’s perspective at first glance, it should be noted that the tenant must show that it is unable to pay rents, and not just that its business has been adversely affected by Covid-19,” says OCBC.

Meanwhile, FCT’s gearing ratio as at Dec 31, 2019, is at a healthy 33.2%. It also had $188 million of debt maturing in 2Q20 to 4Q20.

“From our understanding, FCT also had total revolving credit facilities of about $310 million, of which $160 million had been used to refinance two MTN tranches which forms the bulk of the $188 million of debt maturing in FY20. Another some $40 million would be utilised for working capital needs and thus a balance of $110 million remains for future use,” says OCBC.

In its 1Q20 results report, FCT’s total security deposits amounted to $53.6 million (both current and non-current portion), which translates to some 3.5 months of its total rental income.

With all these in mind, OCBC is incorporating more conservative assumptions.

“We take into account FCT’s rental concessions to its tenants (including pass through of property tax rebate and release of security deposits), and assume a rental deferment of six months by 20% of its tenants as our base case scenario (with income void partially offset by the drawdown of security deposits). We also incorporate lower rental and occupancy rates in our model,” says OCBC.

The research house has also cut its DPU forecasts on the trust by 13.3% for FY20 and 6.4% for FY21. It also raised its cost of equity assumption from 5.7% to 6.6%, while lowering terminal growth rate assumption to 1% from 1.5%.

As at 12.30pm, units in FCT are trading 5.18% higher at $2.03 or 0.9 times FY20 book with a DPU yield of 5.6%.