Singapore Company Focus Frasers Centrepoint Trust Bloomberg : FCT SP | Reuters: FCRT.SI Refer to important disclosures at the end of this report DBS Group Research . Equity 7 Mar 2016 Igniting the northern star BUY • Northpoint AEI to accelerate growth for FCT in the Last Traded Price: S$1.96 (STISTISTISTI : 2,837.00) medium term Price Target : S$2.11 (8% upside) (Prev S$2.04) • Investors over-concerned about the impact of AEI Reason for Report : Response to the upcoming Northpoint AEI on DPU; we believe Manager has sufficient Potential Catalyst: Northpoint’s integration with Northpoint City to flexibility and buffer to maintain returns become the desitination mall. Where we differdiffer:::: In line with concensus. • BUY call maintained, TP revised to S$2.11 Analyst Northpoint AEI is a quantum leap forward. We remain excited Derek Tan +65 6682 3716 [email protected] about the planned AEI and integration of the Northpoint asset Mervin Song CFA +65 6682 3715 [email protected] Singapore Research Team with the extension wing currently built by the Sponsor. With an enlarged footprint, we see Northpoint as a key driver in accelerating growth in the medium term. Our positive stance Price Relative comes from the group having close to 75% market share of S$ Relative Index retail malls (comparable malls basis), and entrenching itself 2.6 208 2.4 further as a major player in the northern part of Singapore. We 188 2.2 are positive on the AEI given that (i) the northern region has the 168 2.0 148 lowest retail space density in Singapore; and (ii) the fast 1.8 128 population growth in the North region should support retail 1.6 108 spending in the medium term. 1.4 88 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Northpoint’s AEI and integration with upcoming Northpoint Frasers Centrepoint Trust (LHS) Relative STI INDEX (RHS) City will be value accretive and DPU enhancingenhancing. Investors have Forecasts and Valuation been overly-concerned about the impact of rising vacancies on FY SepSepSep (((S$S$S$ mmm) 2015 AAA 2016 FFF 2017 FFF 2018 FFF distributions in FY16-17F. While we expect shorter term Gross Revenue 189 184 186 203 Net Property Inc 131 127 128 143 volatility in earnings, we see the Manager having enough Total Return 171 97.1 95.2 107 flexibility to maintain DPU from (i) tweaking management fees; Distribution Inc 110 110 112 (ii) driving performance from its other malls; and (iii) keeping a EPU ( S cts ) 11.7 10.5 10.3 11.5 close lid on costs. We have assumed 11.5% ROI on estimated EPU Gth (%) 4 (10) (3) 12 DPU ( S cts ) 11.6 11.9 11.9 12.1 capex of S$45m in our forecast, and believe this return is DPU Gth (%) 4 2 0 1 achievable given historical returns of 11%-17% on FCT’s AEI. NAV per shr ( S cts ) 191 190 188 188 We have revised our DPU estimates to 11.89-12.07Scts (forward PE (X) 16.7 18.5 19.0 16.9 Distribution Yield (%) 5.9 6.1 6.1 6.2 yield 5.6-5.7%) over FY16F-18F. P/NAV (x) 1.0 1.0 1.0 1.0 Maintain BUYBUY;;;; TPTPTP revised to SSS$2.11.S$2.11. We believe FCT offers a Aggregate Leverage (%) 28.2 28.8 29.5 29.6 RO AE (%) 6.2 5.5 5.4 6.1 steady and sustainable DPU outlook, due to its stable portfolio of suburban malls and its current conservative management fee structure, despite the temporary reduction in revenue from Distn. Inc Chng (%): (1) (4) (5) Consensus DPU (S cts )::: 12.0 11.9 12.0 Northpoint’s 18-month AEI period. FCT will be a beneficiary of Other Broker Recs: B: 13 S: 2 H: 3 the fast growing population in northern Singapore due to its near-monopoly market share of shopping space in the area. At A Glance ICB Industry : Real Estate Issued Capital (m shrs) 918 ICB Sector: Real Estate Investment Trust Mkt. Cap (S$m/US$m) 1,794 / 1,305 Principal Business: Frasers Centrepoint Trust is a retail real estate Major Shareholders (%) investment trust with a portfolio of shopping malls located in Frasers Centrepoint Ltd 41.0 suburban areas in S ingapore. Schroders Plc 6.0 Source of all data: Company, DBS Bank, Bloomberg Finance L.P Free Float (%) 58.5 3m Avg. Daily Val (US$m) 1.4 ed: JS / sa: JC Company Focus Frasers Centrepoint Trust INVESTMENT THESIS Profile Rationale Frasers Centrepoint Trust is a retail real estate investment FCT is one of our top picks in the retail sector. We maintain trust with a portfolio of shopping malls located in suburban our BUY recommendation, with a revised TP of S$2.11. areas in Singapore. Its two largest assets are Causeway Point While many other SREITs are expected to face declining DPU and Northpoint. over the next couple of years due to the slowing Singapore economy, FCT offers investors a steady DPU profile. This arises from FCT’s current conservative strategy of paying the majority of its management fees in cash, which enables FCT to temporarily increase payment of fees in units to sustain DPU as its Northpoint property undergoes AEI from Mar 2016 to Sep 2017. NearNear----monopolymonopoly of shopping malls in the north. Northpoint and Causeway Point together contribute c.71% of FCT’s NPI. Both malls have performed well in recent years, delivering strong tenant sales growth and rental reversions after successful AEI works. With limited retail supply in the north of Singapore and strong population growth (88% over the next five to ten years), we believe that FCT will be a beneficiary of increase in retail spending and demand for shop space. Earnings kicker upon integration of Northpoint with Northpoint City in 2018. Upon the completion of the AEI and integration of Northpoint and Northpoint City in 2018, the quality of FCT’s earnings will improve. Its position in the North will be further strengthened by having the next destination mall to-be. Valuation Risks We have raised our DCF-backed TP to S$2.11 from S$2.04, Interest rate risks. About 74% of current borrowings have after imputing the Northpoint AEI. been hedged into fixed rate debt, and the Manager has guided that it does not intend to hedge 100% in a relatively benign interest rate environment. Distributions could be impacted by near-term interest rate volatility. NearNear----termterm fall in NPI marginmargin.. Northpoint contributes 28% of the portfolio’s total NPI. As Northpoint’s average occupancy drops to 76% during the AEI period (Mar 2016- Sep 2017), some narrowing in portfolio NPI margin is expected. While we believe FCT is able to maintain its DPU payout by tweaking management fees, however, prolonged disruptions from integration to the upcoming Northpoint City could affect rental income from Northpoint in the medium term. Source: DBS Bank Page 2 Company Focus Frasers Centrepoint Trust Northpoint AEI is the turnkey to accelerate growth PPPlannedPlanned Northpoint AEI will allow FCT to bring the malls’ in Dec 2015. Given the estimated sizeable 28% contribution performance and offerings to the next levellevel.... Frasers of Northpoint to FCT’s net property income (NPI), there have Centrepoint Trust (FCT) announced in 4QFY15 that the REIT been concerns by investors on the sustainability of the REIT’s will be embarking on an 18-month Asset Enhancement distributions throughout the course of the AEI, which we Initiative (AEI) for Northpoint Shopping Centre. The planned believe are overplayed. works will commence in Mar 2016, and be completed in Sep 2017. We believe that there is sufficient flexibility from the Manager to maintain distributions despite disruptions over the course of The AEI will focus on enhancing the shopping experience, the AEI. In fact, we are positive on the performance of the boosting the diversity of retail offerings and enabling the mall mall post integration between Northpoint Shopping Centre to benefit from the upcoming integration with the retail and Northpoint City given the combined NLA is estimated to component of Northpoint City, a lifestyle destination owned be approximately 2.5 times of the existing mall which will by its sponsor Frasers Centrepoint Limited, which is scheduled enable FCT to attract a larger pool of potential tenants, for completion by 2018. beyond Northpoint’s current capability. The existing mall is expected to remain open for business during the course of the AEI and average occupancy at the mall will likely to drop to 76% during the period, from 98.2% Chart 2: Integration between Northpoint Shopping Centre Chart 1: Northpoint’s NPI Contribution is estimated to be and Northpoint City (the latter is under construction by the c.28%, which is the second largest mall in the portfolio Sponsor and is not owned by FCT) Source: Company, OneMap Singapore, DBS Bank Page 3 Company Focus Frasers Centrepoint Trust Northpoint to make the “next quantum leap” EEEntrenchingEntrenching its position in the northern region of SingaporeSingapore.. (Northpoint Shopping Centre and Northpoint City) has the Notwithstanding the impact of short-term volatility in potential to become a destination mall of the North. occupancy rates on revenues, we see many positive prospects of Northpoint post the AEI in 2018. CannCannibibibibalialialialissssationation of Causeway PPPointPoint is not a major concern in our viewview. Probably another concern is whether the Once Northpoint City (under construction by FCL) is integrated combination of Northpoint and Northpoint City may with Northpoint Shopping Centre by 2018, the combined NLA cannibalise the performance of Causeway Point, FCT’s largest of the integrated mall will increase by approximately 2.5 times asset which is also located in the north.