Frasers Centrepoint Trust

Price targets:

RHB Bank Singapore ‘neutral’ $2.15 DBS Group Research ‘buy’ $2.60 Citi Research ‘buy’ $2.51

Right moves with gearing to be lowered

RHB Bank Singapore’s Vijay Natarajan has maintained his “neutral” call on Frasers Centrepoint Trust (FCT) but with a slightly raised target price of $2.15 from $2.13.

FCT, as part of its portfolio pruning, cut its stake in Malaysia-listed Hektar REIT. This divestment follows its recent sale of Changi City Point for $338 million announced on Aug 30.

The way Natarajan sees it, the management is making the right moves as it is “further crystalising” its strategy of recycling non-core assets to reduce gearing. “This allows FCT to position itself for the right opportunities to increase stakes in newer dominant malls,” writes the analyst in a Sept 26 note.

On 22, FCT announced the divestment of 143.9 million Hektar REIT units, equal to 29%, for RM128.1 million ($37.3 million). This will leave FCT with just 10.6 million units, which will be sold off at a later date.

At RM0.89, the selling price is at a 48.3% premium to Hektar’s Sept 22 closing price but a 27% discount to its book value and a 10% discount to FCT’s carrying value. FCT first bought into Hektar back in May 2007 when the latter went IPO. From the sale, FCT will be booking net proceeds of $37.1 million and together with proceeds from Changi City Point, bring its gearing to below 37% level.

With this, Natarajan believes FCT will have a debt headroom to add a 10% stake in Nex mall from 25.5% now, which will cost around $210 million, without tapping into the equity market.

Further down the road, the analyst believes that FCT could potentially divest its stakes in Century Square mall and Central Plaza office.

Meanwhile, FCT is seeing some operational improvements. Natarajan, citing RHB’s economists, says retail sales momentum is expected to pick up in 4Q2023, aided by seasonal events, resilient domestic demand and front-loading of consumer demand in anticipation of a GST rate hike from 8% to 9% in January 2024.

This trend will help lift tenant sales at FCT’s malls, which were already 16% higher on average above pre-pandemic levels, and, thereby, help FCT achieve low- to mid-single-digit positive rent reversions.

Natarajan’s new target is derived after taking into account a 1% dip in distribution per unit for FY2024 and FY2025, interest costs and lower cost of equity assumptions by 5 bps after factoring in a healthier balance sheet. He notes that at the current unit price of 0.9x book value and 6% yield, FCT’s valuation is not compelling and therefore his “neutral” call. “We continue to recommend unitholders to buy on dips.”

In contrast to RHB, DBS Group Research and Citibank are more bullish on this counter. “We see management’s laser-like focus and strong commitment to focus its efforts on managing and acquisition of dominant suburban retail properties within Singapore’s retail landscape to reap long-term benefits for unitholders,” says DBS, with a “buy” call and $2.60 target price.

Citibank has also kept its “buy” with an unchanged target price of $2.51, given how FCT will now lower its gearing while positioning itself for rental upside. — The Edge Singapore