The Positives
+ Better performance despite softer retail sector outlook. Shopper traffic up 6.1% YoY, due to higher traffic at NPNW and YewTee Point. Tenant sales psf grew a modest 2.9% YoY for the two months ending May 2019. Revenue improved 1.6% YoY with all malls recording higher revenues, save for Causeway Point (CWP) whose occupancy took a hit due to AEI works for the underground pedestrian link (TBC December 2019). Largest contributors to revenue growth were NPNW (+3.8%), Changi City Point (+5.5%) and Bedok Point (+13.9%).
+ Higher portfolio occupancy and positive rental reversions. Portfolio occupancy improved from 96.0% to 96.8%. Better occupancy at all malls except Changi City Point (-30bps) and Anchorpoint (occupancy unchanged). Significant improvements in occupancy at Bedok Point (88.7% to 95.0%), YewTee Point (94.1% to 96.5%) and Northpoint City North Wing (NPNW) (96.5% to 97.1%). Positive rental reversions at all malls, except YewTee Point (-2.5%), with reversions for the portfolio as a whole coming in at +3.1%.
The Negatives
– Post-Waterway Point acquisition gearing increased to 32.7% (FY18 28.6%) and lower interest coverage ratio of 4.5x (FY18 5.6x). Gearing increased a significant 410bps post-Waterway Point acquisition. However, the gearing of 32.7% is still conservative in our view, given the gearing limit of 45%. Borrowing cost ticked up 10bps to 2.7% due to higher percentage of borrowing on fixed cost (3Q19/FY18 67%/64%).
Outlook
FCT’s malls are located in suburban residential areas with comparatively lower retail space per capita, for instance, <3 sqft of mall floorspace per capita versus >6 sqft in the central parts of Singapore (Figure 1). FCT’s biggest asset, CWP, stands to gain tremendously from the transformation of Woodlands Regional Centre, which will anchor itself as the largest economic hub in the North region. Waterway Point (33.3% stake), FCT’s latest acquisition, is also primed to benefit from the absence of supply coming onto the outer north-east area, and will likely remain the dominant mall.
FCT’s interest in PGIM increased from 18.8% to 21.13% due to the redemption of PGIM shareholders from the fund. Together with Sponsor Frasers Property Ltd’s (FPL) 53.74% stake, the group has a 74.87% stake in PGIM. As a private fund, PGIM does not enjoy tax transparency treatment that FCT does – we estimate PGIM’s tax rate to be approximately 10% – 15%. PGIM’s portfolio consists of several suburban retail malls and further entrenches FCT’s presence in the suburban retail space. With the group’s controlling stake in PGIM, FCT’s acquisition of some of PGIM’s assets appears to be in the cards and would yield immediate tax savings.
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We adjusted our forecast to account for the acquisition of the 33.3% stake in Waterway Point and FCT’s increased stake in PGIM. We reduced the risk-free rate owing to the lower interest rate environment – and in doing so, our cost of equity is reduced from 6.90% to 6.55%. We believe there is further upside to FCT’s valuation, with growth catalysts stemming from
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