Frasers Centrepoint Trust - Attractive yields for resilient portfolio (CIMB)

OUTPERFORM Maintained

S$1.39 Target: S$1.63

Mkt.Cap: S$1,069m/US$888m

REIT

Lower accretion but value emerging

Value emerging. FCT has released its circular for its Bedok Point acquisition. While NPI yields and accretion could come in below our expectations, we see upside from leasing out the remaining space of Bedok Point and improved stock liquidity. Management also retains the right of full debt funding in view of volatile market conditions. We cut our DPU estimates by 3-4% on assuming a lower payout of management fees in units but still have not yet factored in the acquisition given a lack of sufficient clarity on funding. Following our DPU adjustments, our DDM-based target price dips to S$1.63 (discount rate 8.4%) from S$1.67. We see value emerging after the stock lost nearly 10% during the recent sell-down, underperforming its retail SREIT peers (likely due to overhang from upcoming equity placement). FY12 DPU yields of 6.4% appear highly attractive against resilient suburban retail exposure and a good balance sheet. We see catalysts from stronger-than-expected rentals for Causeway Point after refurbishment and improved stock liquidity.

The news

FCT has released its circular for its proposed acquisition of Bedok Point, providing greater details on the asset and funding. NPI margins are estimated at about 59% while NPI yields are about 5.5%. Financing is likely to be 51.2:48.8 debt to equity, translating into debt of about S$65m and a private placement of up to 55.0m units. But noting volatile market conditions, management has retained the right to fund the acquisition entirely with debt if the placement price is not favourable. All the above is subject to shareholders’ approval at an EGM on 12 Sep.

Comments

Lower margins and accretion. Actual NPI yields of 5.5% are below our previous expectation of 5.75% due to a lower-than-expected margin of about 59% vs. 68% for its existing portfolio. We understand that this is due to a higher concentration of F&B and entertainment offerings in the mall. Coupled with a likely lower pricing for its private placement after the recent market sell-down, accretion from the acquisition could be only marginal, lower than our previous expectation of about 1% for FY12.

But room for upside. NPI yields, however, compare well with yields for its existing portfolio (5.3%) and those of recently-concluded retail transactions (3.7-5.0% for Iluma, Vivo City and Jurong Point extension). Positioned as an F&B and entertainment mall with good shopper traffic, we believe management still sees opportunities for tenant management to improve shopper traffic and rents. Upside could also come from occupancy improvements, with NPI yields expected to climb to 5.65% on full occupancy (from current committed occupancy of 97.4%).

Improved liquidity could provide re-rating catalysts. The sponsor will not be subscribing to any new units in the private placement. However, it will take up new units up to its pre-placement stake of 43% should the placement not be fully subscribed by other investors. With poor stock liquidity previously a grouse for investors, we believe improved stock liquidity after the placement could provide rerating catalysts for FCT.

Retaining flexibility in funding. We understand that management has sufficient debt facilities and stands ready to fund the entire acquisition with debt if the placement price is not favourable. Gearing is expected to rise to a still-comfortable 37% in such a situation. Full debt funding (given cheap debt) would improve accretion from the acquisition, though at the expense of an increased need for equity fund-raising for future acquisitions.

Attractive yields for resilient portfolio. FCT had shed nearly 10% in the recent market sell-down, vs. an average -7% for retail S-REITs. We attribute this to the overhang from its expected equity fund-raising. We see this as a buying opportunity with FY12 DPU yields of 6.4% highly attractive for its resilient suburban retail assets. Financials are strong with asset leverage expected to remain below 35% (assuming management’s intended funding mix) after the acquisition. While there could be slight risks from a lower placement price, we expect DPU dilution to be contained at about 0.6%, even if the maximum 55.0m units were to be issued.

Valuation and recommendation

Value emerging; maintain Outperform. With a lack of sufficient clarity on funding at this moment, we have not yet factored in the acquisition. We sketch out below DPU accretion at various levels of debt funding and placement prices. We are now assuming that 30% of the management fees will paid out in units (vs. previous assumption 65%) as guided by the circular, which lowers our FY12-13 DPU estimates by 3-4%. Our DDM-based target price accordingly dips to S$1.63 (discount rate: 8.4%) from S$1.67. Nevertheless, maintain Outperform as we continue to like FCT for its exposure to resilient suburban retail assets and a strong balance sheet, expecting catalysts from stronger-than-expected rentals for Causeway Point after refurbishment and improved stock liquidity.