• Keep NEUTRAL, higher SGD2.35 TP from SGD2.30, 3% upside. Frasers Centrepoint Trust’s acquisition of additional stake in NEX, the largest prime suburban mall, is a positive move. Post the acquisition, FCT will become Singapore’s largest prime suburban retail mall owner by NLA. This DPU- accretive acquisition will be funded by a combination of recent divestment proceeds and equity fund-raising, with income upside potential if tax transparency is achieved. The current valuation of 1x P/BV is fair and we continue to recommend a buy-on-dips strategy.

• Acquisition of additional 25% effective interest in NEX from the sponsor for SGD523.1m – this takes FCT’s overall interest in the asset to 50%. The agreed property value of SGD2.127bn, based on the average of the latest two independent valuations, is c.1% above Sep 2023’s valuation of the asset, which translates into a 4.8% NPI yield. FCT purchased the initial 25% stake in Jan 2023 at 2% below the current valuation. We like this acquisition, as it provides earnings stability, diversification, and economies of scale in the longer run. NEX is currently fully occupied (99.9%) and upside potential is seen via reconfiguration of tenant space, asset enhancements, and low occupancy costs offer potential for healthy positive rent reversions.

• Mildly DPU accretive, but huge upside potential if tax transparency status is achieved. On a standalone basis, the acquisition will be DPU accretive at 0.4% to FY23 DPU but, factoring in the recent divestment of Changi City Point and Hektar REIT’s (HEKT MK, NR) stake, overall accretion to FY23 DPU is expected to be at 1.5%. This is based on assumed debt funding costs of 3.8% pa. However, there is a good upside potential of SGD7m pa in tax savings if FCT manages to restructure the holding for tax transparency. The REIT noted that, in order to restructure and achieve tax transparency status, it will need the consent of other investment partners – even after getting consent, the process will likely take 12-18 months.

• Placement to raise no less than SGD 200m at an issue price range of SGD2.16-2.2040 or a 1.8-3.8% discount to adjusted volume-weighted average price of yesterday’s closing price. The post-acquisition gearing will stand at 37.8%, which we believe is a comfortable level. The next move in our view is a possible divestment of the Central Plaza office, which could provide additional SGD200m-plus in capital recycling for the REIT.

• We revise up FY24F-26F DPU by 1-2%, factoring in accretion from acquisition. FCT has taken various tangible sustainability initiatives recently – eg installation of solar panels, food waste valorisation, water usage efficiency, and smart lifts – which is expected to result in an annual opex savings of SGD1m pa. FCT has a high ESG score of 3.4 (out of 4.0), ie three notches above the country median score, resulting in a 6% ESG premium.

Source: RHB Research - 25 Jan 2024