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RHB maintains ‘neutral’ on Frasers Centrepoint Trust with lower TP of $2.09

Bryan Wu
Bryan Wu12/5/2022 03:51 PM GMT+08  • 3 min read
RHB maintains ‘neutral’ on Frasers Centrepoint Trust with lower TP of $2.09
Waterway Point, part of FCT's portfolio. Photo: Albert Chua/The Edge Singapore
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RHB Group Research analyst Vijay Natarajan has maintained his “neutral” call for Frasers Centrepoint Trust (FCT). However, he has lowered his target price (TP) to $2.09 from $2.45 previously.

In his report dated Dec 5, Natarajan says that FCT’s suburban mall portfolio is “resilient but not immune” to inflationary pressures and rising interest rates. Overall, the analyst expects upsides from increased occupancy and rental upticks to be offset by higher financing costs and lower margins.

Natarajan notes that FCT is no longer a “leading contender” for the purchase of trimmed retail portfolio assets from Mercatus Co-operative, which he believes is not “bad news” considering the current challenging market conditions.

Following a report that Hong Kong listed Link REIT has emerged as the frontrunner in the race to acquire Mercatus’ portfolio, the analyst says that although FCT was tipped to be among potential candidates, the latest news does not come as a surprise. “Challenging equity funding environment and higher debt costs have largely dimmed any accretion potential for such a portfolio,” he explains.

“In our view, FCT could focus instead on increasing its stake in Waterway Point, of which it already owns 50%, or acquiring North Point City South Wing at the right opportunity as these assets offer greater familiarity, synergy and value extraction potential for FCT,” adds Natarajan. He points out that with gearing at 33%, FCT has over $500 million in debt headroom before it crosses the 40% level.

FCT has currently hedged 71% of its borrowings and according to his estimates, every 50 basis points (bps) increase in interest rates is expected to have an estimated 2% impact on its distribution per unit (DPU).

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In addition, Natarajan says that FCT has around 48% of debt due for refinancing in the next two years which should result in an estimated 100bps increase in overall interest cost.

Given higher financing costs, lower margins and “tweaking up” rents, Natarajan has revised FCT’s FY2023 and FY2024 DPU down by 3%. His cost of equity (COE) assumption has been lifted up by 70bps to factor in rising rates, which has resulted in a lower TP of $2.09.

Meanwhile, he expects occupancy and rents to remain firm, but anticipates pressure on margins. FCT’s portfolio occupancy rose 0.4 percentage points (ppt) q-o-q to 97.5%, with contribution from its three large dominant malls, Causeway Point, North Point City North Wing and Waterway Point. Rent reversion saw a turnaround with an increase of 1.5% in FY2022, compared to a decrease of 0.6% in FY2021 on an incoming compared to outgoing basis, as underlying tenant sales across FCT’s malls rose 10% above pre-Covid levels.

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Natarajan notes that occupancy cost for FCT fell to 16.2% in FY2022 compared to 19.2% at the peak of Covid-19 in FY2020, while its net property income (NPI) margin is expected to see around a 2% compression with most of the utility rate hedges across its malls rolling over to high spot market rates by May 2023.

As at 3.48pm, units in FCT were trading 5 cents or 2.49% up at $2.06 with a dividend yield of 5.08%.

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