Excerpts from OCBC Investment Research report
Frasers Centrepoint Trust (SGX: J69U)
- Fraser Centrepoint Trust 2HFY24 (financial year ending 30 Sep 2024) distribution per unit (DPU) flat year-on-year (YoY); down 0.9% for FY24
- Solid rental reversions of 7.7% clocked in FY24 while retail portfolio committed occupancy nearly full at 99.7% (unchanged quarter-on-quarter (QoQ)).
- Slightly higher portfolio valuation which helped lower aggregate leverage ratio to 38.5%, or 0.6 percentage points (ppt) lower QoQ
Investment thesis
Frasers Centrepoint Trust (FCT) had previously established a strong track record of delivering positive DPU growth every year since its listing in Jul 2006 to FY19.
However, this impressive track record was broken in FY20 given unprecedented measures introduced by the Singapore government to tackle the Covid-19 pandemic, such as mandatory rental relief to tenants.
FY21 saw a firm rebound in DPU back to FY19 levels. Growth continued in FY22 (+1.2%), but the jump in borrowing costs led to FY23 and FY24 DPU declining marginally by 0.6% and 0.9%, respectively.
The start of the Federal Reserve ‘s (Fed) rate cut cycle would provide some reprieve, although it will take time for cost of debt to come down more meaningfully, in our view.
Operationally, we believe FCT’s relatively more defensive and resilient portfolio of suburban malls in Singapore would position it favourably amid an uncertain macroeconomic landscape, given their dominant positions in their respective catchment areas.
Management’s astute divestments has also alleviated the strain on its balance sheet, and it is now better positioned to pursue inorganic growth opportunities and asset enhancement initiatives (AEI).
HFY24 DPU flat YoY but down slightly 0.9% for FY24
Fraser Centrepoint Trust’s 2HFY24 gross revenue and NPI fell 2.5% and 0.6% YoY to SGD179.5m and 128.8m. This was due largely to loss of income from the divestment of Changi City Point and AEI at Tampines 1.
However, DPU came in flat at 6.02 Singapore cents. For FY24, FCT’s NPI dipped 4.6% to SGD253.4m due to similar reasons highlighted earlier.
Finance costs rose 3.9% to SGD84.2m, while the number of units outstanding increased 6%, such that overall DPU declined by 0.9% to 12.042 Singapore cents. This accounted for 100.9% of our forecast, which we deem to be in-line with our expectations.
Robust rental reversions coupled with healthy levels of occupancy
Frasers Centrepoint Trust achieved robust retail portfolio rental reversions of 7.7% in FY24 (FY23: 4.7%). What made it even more impressive was that this rental
uplift was for a sizeable 31% of FCT’s retail portfolio net lettable area (NLA).
Causeway Point clocked healthy rental reversions of 8.8% for 43% of the mall’s NLA and we believe this reflects retailers’ confidence, notwithstanding the upcoming Johor Bahru Singapore Rapid Transit System earmarked for end 2026.
Overall retail portfolio occupancy was unchanged at a high level of 99.7%. Tampines 1 completed its AEI and the return on investment (ROI)
exceeded management’s target of 8%.
Frasers Centrepoint Trust’s tenants’ sales and shopper traffic grew 1.2% and 4.2%, respectively in FY24, with the former averaging 20% above pre-pandemic levels (using FY19 as benchmark).
As rents have grown faster than tenants’ sales, FCT’s retail portfolio cost increased from 15.6% in FY23 to 16.0% in FY24, but we would still consider this a very healthy level.
Slight uptick in portfolio valuations while aggregate leverage ratio declined to 38.5%
Frasers Centrepoint Trust’s year end valuation exercise saw no surprises. Cap rates for all its assets remained unchanged, while overall portfolio value rose 1.2% to SGD5,283m.
Its aggregate leverage ratio moved down from 39.1% (as at 30 Jun 2024) to 38.5%, partly due to the revaluation gains. Management has secured facilities to refinance its debt due in FY25 and has no refinancing needs until FY26.
Overall debt hedged increased to 71.4%, while all-in average cost of debt edged down by 10bps QoQ to 4.1%. Management expects this to stay
around the low-4% level in FY25.
Valuation/Recommendation
We raise our FY25 DPU forecast slightly by 0.7% and roll forward our valuations with a marginally lower cost of equity assumption of 6.1% (previously 6.2%). Consequently, our fair value estimate increase from SGD2.46 to SGD2.53
You can find the full report here and the company website here.Â
