Good results despite fall in revenue.Frasers Centrepoint Trust (FCT) declared 3.039c DPU for 2Q16, increasing 2.6% YoY. While the topline was 0.8% lower YoY due to Northpoint AEI which started in March, NPI is higher by 0.4% YoY due to lower utility tariff rates and write-back of provision for property tax. DPU is higher also due to a larger proportion of management fees collected in units, instead of taken in cash.

Further updates on Northpoint AEI.  Northpoint AEI is budgeted at S$60m (Previous assumption: S$20m) and is expected to complete in Sep 2017. While we like that FCT&rsquo s target of 9% improvement in average gross rental rate is larger than our previous assumption of 4%, the NLA of the mall would shrink by ~4%. Meanwhile, we are hopeful that NPI margins at Northpoint can improve as property expense may fall after the AEI, and economies of scale can be achieved when Northpoint City is completed in 2018.

Robust rental reversions and footfall to mitigate retail headwinds.  Rental reversions in 1H16 is already 12%, significantly higher than the reversions of 6.3%-6.5% achieved in the prior two FYs. Tenant sales for Dec 15&mdash Feb 16 grew 2.1%, with a general uptick in shopper traffic since 4Q14. Despite the weak retail sales figures, we think FCT will continue to deliver good performance due to its well-located suburban malls. The worst may be over for Bedok Point as occupancy improved 9.3pp QoQ and has only 2 leases expiring in FY16. Another anchor tenant is expected to join the mall soon.

Lower borrowing costs.  Average cost of borrowings fell to 2.286% (1Q16: 2.404%) as FCT refinances some of the costlier debt expiring in FY2016. With a lower interest rate environment, we lower our long-term cost of borrowings by 20bp to 3.5%.

Potential acquisition.  FCT may make acquisitions in Australia this year. However, Waterway Point is likely to be off the cards till next FY.

Maintain BUY on 5.9% yield.  We keep our BUY on FCT with FY16F 5.9% yield amidst the low-interest rate environment. We like its defensiveness with a portfolio of suburban malls, and have increased our TP to S$2.10 as we look forward to higher rentals at NP post-AEI with lower financing costs.




 


Hong Wei Wong
Analyst
Research Department 

KGI FRASER SECURITIES PTE. LTD.
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www.kgifraser.sg