1HFY22: Resilient And Defensive Shield
Rent reversion turned around to positive territory at 1.7% in 1HFY22. Retail occupancy
improved 0.6ppt qoq to 97.8% in 2QFY22. Tenant sales have surpassed pre-COVID-19
levels since Oct 21. FCT is a defensive shield due to its focus on necessity spending at
suburban retail malls. It is well positioned to pursue acquisitions after lowering its
aggregate leverage to 33.3% through divestment. BUY for a defensive distribution yield
of 5.3% for FY22. Target price: S$2.96.
RESULTS
? Frasers Centrepoint Trust (FCT) reported DPU of 6.136 S cents for 1HFY22, up 2.3% yoy. It
retained taxable income of S$4.8m out of prudence. Excluding the amount retained,
distributable income would have increased 9.6%.
? Repositioned to focus on dominant malls. Gross revenue and net property income (NPI)
increased 1.5% and 3.8% yoy respectively in 1HFY22 due to full six months of contributions
from the acquisition of the remaining 63.1% stake of AsiaRetail Fund (ARF), which was
completed on 27 Oct 20 (five months of contributions in 1HFY21). This was offset by the
divestment of Anchorpoint, Bedok Point and YewTee Point. FCT did not grant any rental
rebate in 1HFY22.
? Rent reversion recovered to positive territory. FCT achieved positive rent reversion of
1.7% (FY21: -0.6%) (first year rent of incoming lease vs final year rent of outgoing lease)
and 4.1% (average vs average) in 1HFY22. Century Square recorded positive rent reversion
of 8%, while Causeway Point, Waterway Point and White Sands registered positive rent
reversion of 2%. FCT has committed to 176 leases covering 312,731sf of retail space in
1HFY22. Leases accounting for 15.2% of total retail NLA are expiring and have to be
renewed in 2HFY22.
? Occupancy cost has eased to 16.2% in 1HFY22 (FY21: 17.5%). Thus, there is room for
FCT to push for higher rents as retailers benefit from the easing of safe distancing
measures. Management will focus on replacing weak tenants with refreshed offerings that
are more relevant and attractive to consumers.
? Occupancy edges higher. Retail occupancy improved by 0.6ppt qoq to 97.8% in 1HFY22.
The sequential improvement was led by Tampines 1, Century Square and White Sands
where occupancy improved 1.7ppt, 2.3ppt and 1.3ppt respectively to 98.8%, 93.4% and
93.8%. Refreshed offerings include Scarlett (supermarket for imported products from China)
at Waterway Point, Malaysia Chiak! (Malaysian street hawker food) at Tampines 1 and
Chateraise (Japanese confectionery) at White Sands.
? Tenant sales have surpassed pre-COVID-19 levels since Oct 21. Shopper traffic has
improved since group size for dining in at F&B establishments was increased from two to five
persons on 22 Nov 21. Work-from-home is no longer the default since Jan 22. With more
employees headed back to their offices, footfall has increased during peak morning and
evening hours. Group size for dining in was further increased to 10 persons on 29 Mar 22.
? Conservative capital management. Aggregate leverage was low at 33.3% as of Mar 22.
The average all-in cost of debt remains stable at 2.2%. The proportion of borrowings hedged
to fixed interest rates has increased from 58% to 68%. Management estimated that every
50bp increase in Swap Offer Rate/Singapore Overnight Rate Average has a negative impact
on DPU of 0.169 S cents per year.
STOCK IMPACT
? Defensive yield from necessity consumption. FCT’s suburban malls are well located with
connectivity to MRT stations and bus interchanges, close proximity to dense population
catchments, and cater to essential services and non-discretionary spending.
? From Dorscon Orange to Yellow. Singapore has downgraded the Disease Outbreak
Response System Condition (Dorscon) level from orange to yellow. The cap on group size of
10 persons for dining in at F&B establishments was lifted since 26 Apr 22. Safe distancing
between individuals is no longer required, whether indoors or outdoors. All employees are
allowed back to their workplaces since 26 Apr 22, compared with the previous limit of 75%.
The substantial easing will improve shopper traffic and tenant sales at FCT’s suburban
malls.
? Cushion against the blow from higher cost of electricity. FCT has fully hedged the
electricity rates for its suburban retail malls in various tranches to reduce concentration risks.
The hedges will progressively expire in FY22 and FY23, which cushions FCT against a
sudden spike in electricity rates.
? On lookout for opportunities to acquire within Singapore. FCT’s balance sheet has
deleveraged with aggregate leverage currently at 33.3%. It could tap on its sponsor pipeline,
such as Northpoint City South Wing. It will also explore opportunities for acquisitions from
third-party vendors, such as further increasing its stake in Waterway Point from 40% to 50%.
EARNINGS REVISION/RISK
? We trimmed FY22 DPU marginally by 0.5%. Improved performance from its suburban retail
malls helps FCT to cope with higher operating expenses from higher cost of electricity.
VALUATION/RECOMMENDATION
? Maintain BUY. Our target price of S$2.96 is based on DDM (cost of equity: 6.0%, terminal
growth: 1.8%).
SHARE PRICE CATALYST
? Gradual but steady recovery in shopper traffic and tenant sales, accompanied by
progressive easing of social distancing measures.
? Acquisition of Northpoint City South Wing from sponsor Frasers Property.