SINGAPORE (May 12): Amid a subdued economic environment and footfall at retail spaces following the circuit breaker measures, KGI analyst Joel Ng has an “outperform” call on Frasers Centrepoint Trust (FCT) at a target price of $2.39 down from his previous $2.51 call.

Ng’s optimism stems from expectations that retail assets in Singapore “should perform better given the different dynamics at play”.

“We acknowledge the challenges facing retail [Real Estate Investment Trusts] REITs like FCT in 2020. Investors should however look beyond the current weakness and identify positive trends shaping the future of physical retail malls,” he adds in a May 11 note.

Specifically, Ng believes FCT’s six suburban malls would “recover faster than [its] peers” given its natural catchment of foot traffic. These six malls are scattered across Singapore and includes: Causeway Point, Northpoint City North Wing, Waterway Point, Changi City Point, YewTee Point and Anchorpoint

Collectively, they house over 900 tenants from clothing and apparel, drugstores, supermarkets and even movie theatres.

Its most recent results for 2QFY20 ended March saw FCT posting a distribution per unit (DPU) of 1.61 cents, a 48.7% plummet from the previous year’s 3.14 cent distribution. This comes on the back of an enlarged unit base, as well as the retention of 50% of its distributable income to preserve its financial flexibility during the Covid-19 pandemic.

The amount attributable to unitholders fell correspondingly by 38.3% to $18 million, while net property income (NPI) was down a smidgen 1.3% to $36.0 million.

For now, the group has given out rebates to its occupants under its Tenant Support Package – a move which the REIT’s manager says will possibly impact FCT’s revenue, income available for distribution and cashflows for the rest of its FY20.

To Ng, FCT’s recent results are “decent” since NPI was holding steady and occupancy was stable at 96.1%. However, is looking at FCT’s current unit price trading 1.0x below price-to-book given the weakness of the pandemic on the trust’s operations.

Aside from this, he cautions of a retail apocalypse as physical retail stores die slowly as consumers are forced to switch to online retailers.

Still, Ng believes the trust still has growth opportunities to benefit from. This includes FCT’s conservative 33% gearing ratio which gives it significant debt headroom to either grow through acquisitions or by funding asset enhancing initiatives (AEI), he notes.

Its Causeway Point at Woodlands for one, may benefit from such a move as the government looks towards developing the Woodlands Regional Centre it is situated in.

Additionally, Ng believes consumer traffic at FCT’s malls will recover faster given its proximity to residential areas and offerings of essential items.

“Reinforcing this viewpoint is that its top 10 tenants, which accounted for 22% of Gross Rental Income (GRI) in 2QFY20, caters mainly to either groceries, F&B or small discretionary shopping (fashion brands like Uniqlo),” he elaborates.

Looking ahead, NG expects FCT’s FY20F DPU to decline 17% to 10 cents, before reversing its course with a 15% increase to 11.5 cents in FY21F. “A key upside re-rating for retail REITs is the gradual relaxation of circuit breaker measures going into 2H20, and the payout of dividends which have been held back,” he muses.

In this time he cautions that negative rental reversions may pose a strain on dividends and property values.

As at 9.53am shares at FCT were up 2 cents or 0.97% to $2.08.