• Frasers Centrepoint Trust (SGX:J69U)’s suburban mall portfolio is expected to stay resilient in the face of a slowing economic growth but it is not immune to inflationary pressures and rising interest rates.
• Frasers Centrepoint Trust has also seemed to have dropped out of race to acquire Mercatus malls, which we believe is not a bad news in the current challenging market conditions.
• Overall, we expect upside from occupancy increase and rental uptick to be offset by higher financing costs and lower margins.

Not a Leading Contender for Mercatus’ Portfolio Anymore

• Reuters reported that Hong Kong listed Link REIT (823 HK) has emerged as the frontrunner in the race to buy the trimmed retail portfolio assets from Mercatus Co-operative Ltd. estimated at S$2.5bn. Frasers Centrepoint Trust was tipped to be among potential candidates but the latest news does not come as a surprise as challenging equity funding environment and higher debt costs have largely dimmed any accretion potential for such a portfolio.
• In our view, Frasers Centrepoint Trust could focus instead on increasing its stake in Waterway Point (50% owned) or acquiring North Point City South Wing at the right opportunity as these assets offer greater familiarity, synergy, and value extraction potential for Frasers Centrepoint Trust.
• With gearing at 33%, Frasers Centrepoint Trust has > S$0.5bn in debt headroom before it crosses the 40% level.

Occupancy and Rents to Remain Firm, But Expect Pressure on Margins

• Frasers Centrepoint Trust's portfolio occupancy rose 0.4ppt q-o-q to 97.5% (i.e. near full occupancy), with its three large dominant malls (Causeway Point, North Point City North Wing, and Waterway Point) registering.
• Rent reversion saw a turnaround with +1.5% in FY22 (FY21: -0.6%) on incoming vs outgoing basis as underlying tenant sales across its malls rose 10% above pre-COVID-19 levels.
• Occupancy cost fell to 16.2% vs 19.2% the peak in FY20. NPI margin is expected to see a ~2% compression as most of the utility rate hedges across its malls will be rolled over to high spot market rates by May 2023.
• Frasers Centrepoint Trust currently hedged 71% of its borrowings and every 50bps increase in interest rates is expected to have a ~2% impact on its DPU.
• In addition, Frasers Centrepoint Trust has a high ~48% of debt due for refinancing in the next two years which we expect should result in ~100bps increase in overall interest cost.

Frasers Centrepoint Trust – Valuation and Recommendation

• We have revised down FY23-24F DPU forecast for Frasers Centrepoint Trust by 3% due to higher financing costs, lower margins, and tweaking up the rents. Our COE assumption is lifted up by 70bps to factor in rising rates resulting in a lower target price.
• We raise Frasers Centrepoint Trust’s ESG score by a notch to 3.2 (out of 4.0) by raising environmental score on the back of its efforts and carbon emission reduction targets. As this score is two notches above the country median we applied a 4% premium to our intrinsic value to derive target price.
• Keep NEUTRAL rating on Frasers Centrepoint Trust with a lower target price of S$2.09 from S$2.45, 4% upside.

Source: RHB Invest Research - 5 Dec 2022