• Beneficiary of reopening but expect some impact from more locals travelling overseas
• Suburban retail market continued its gradual recovery
• Expect further actions on capital management
Beneficiary of reopening – We expect FCT to largely benefit from Singapore’s reopening drive, although more Singaporeans travelling overseas due to pent-up demand could also dampen shopper traffic to its malls, especially during the upcoming and Jun and Dec holiday periods. However, recovery from the pandemic should continue to gain traction, in our view, as group sizes of up to 10 fully vaccinated persons are allowed to dine-in at F&B establishments with effect from 29 Mar 2022, from five persons previously. Furthermore, activities and events can now be held in mall atriums, except for food fairs. Although revenue from atrium spaces have historically formed only ~2-3% of FCT’s revenue, the increase in vibrancy will likely provide a boost to footfall for FCT’s malls.
Suburban retail market rents continued to improve gradually – Based on property consultant CBRE
Research’s latest 1Q22 data, suburban retail rents in Singapore rose 0.2% quarter-on-quarter (QoQ) to SGD30.15 psf/month. This was the fourth consecutive quarter of QoQ increase, although the pace of improvement moderated slightly from 4Q21’s 0.5% increase. FCT disclosed that its portfolio tenants’ sales formed 113% of its pre-Covid average in Jan 2022. This figure was also above 100% in Nov and Dec 2021, at 101% and 106%, respectively. Shopper traffic still lagged, coming in at 69%, 66% and 58% in Jan 2022, Dec 2021 and Nov 2021, respectively. This may improve with the increase in more employees returning to their workplaces (capacity limit increased from 50% to 75%).
Near-term buffer from higher utility costs; expecting further actions on capital management – One of investors’ key concerns on the S-REITs sector is rising utility costs. We believe FCT is sheltered from this in the near-term due to contracts which have been locked in for the remainder of FY22 at least. From a balance sheet perspective, FCT hedged only 54% of its debt, as at 31 Dec 2021, but we expect further action on this front and will look out for its updated hedge ratio when it reports its upcoming 1HFY22 results. After adjustments, which include lowering our FY23 DPU forecast by 1.4% on lower margin assumptions and increasing our risk-free rate assumption from 1.9% to 2.5%, our fair value estimate dips from SGD2.81 to SGD2.67.
ESG Updates
FCT has an ESG rating since Jun 2019. FCT has solid management and retention initiatives such as annual engagement survey and professional training opportunities, and these factors may have helped FCT to attain zero attrition in 2020. However, poor disclosures was found on FCT’s executive pay practices and lack of a fully independent pay committee, which caused its corporate governance practices to lag those of its industry peers. On the criteria of ‘Opportunities in Green Building’, FCT has invested in energy and water efficiency programmes to improve the sustainability of its properties. 36% of its properties were certified to the BCA Green Mark Scheme as at end-2020. However, there is limited efforts to increase the proportion of green certified-buildings in FCT’s portfolio relative to peers. BUY. (Research Team)