Frasers Centrepoint Trust – A watertight deal May 24, 2019

PSR Recommendation: NEUTRAL Status: Maintained
Last Close Price: S$2.58 Target Price: S$2.36

What is the news?

  • Proposed acquisition of a 33% interest in Waterway Point (WWP) from its Sponsor, Frasers Property Limited (FPL) for a consideration of S$1.3bn (on a 100% basis) – an implied c.S$433.3mn for FCT’s equity-accounted stake (see figure 1 for details on WWP).
  • Equity fund raising (EFR) of S$437.4mn comprising:
  • Private placement proceeds of S$369.6mn which included an fully-taken over-allotment option (2.3x subscribed on 17 May 2019, at the top end of a price range of S$2.30-2.382 per new unit)
  • A pro-rata and non-renounceable preferential offering of S$67.8mn for S$2.30-2.383 per new unit
  • Gross proceeds from EFR intended to partially finance the proposed WWP Acquisition (S$245.3mn) as well as to partially pare down bridging loans related to the earlier announced acquisition of stake in PGIM Real Estate AsiaRetail Fund Limited (PGIM ARF) (c.S$176.4mn).

 

Impact on FCT

  • Expected pro-forma DPU accretion of +0.29% from the proposed WWP acquisition, and +0.65% if also including the PGIM ARF stake (figure 7).
  • Pro-forma gearing following the proposed WWP acquisition would be at 30.7% (FY2018: 28.6%), and at 33.2% if also including the PGIM ARF stake (figure 5).
  • WWP is expected to contribute c.16.5% of the total return (on a pro-forma basis) of FCT’s enlarged portfolio.

 

What do we think?

A highly anticipated and positive move, with FCT’s last sizeable acquisition only back in 2014 (Changi City Point). We believe there is upside for rental escalation and reversion rates, supported by the recent resilience of fringe retail rents (figure 8), as well as favourable attributes specific to WWP – it is part of an integrated residential and retail development with an adjoining visitors’ centre and is next to the Punggol MRT/LRT stations. According to Cistri, the population in WWP’s trade area is expected to increase by a CAGR of +3.8% to 201k by 2023. This comes even after the stabilisation phase of the area, which saw tenant sales and footfall at WWP surge 10% and 4%, respectively, from 2017-2018 (figure 4).

 

Outlook

WWP’s NPI yield of 4.7% is in line with the FCT’s portfolio average, and is poised to match that of its bigger portfolio malls – Causeway Point (CWP) and Northpoint North Wing (NPNW) – which are currently north of 5%, given that it is still in a stabilisation phase (WWP only commenced operations in 2016). Further, this acquisition helps diversify FCT’s earnings base as both CWP and NPNW account for two-thirds of FY18 NPI.

 

Maintain NEUTRAL with higher TP of S$2.36 (prev. S$2.31).

We adjust our FY19e and FY20e DPU estimates by +0.4% and +2.2%, respectively (assuming completion by 4QFY19), to account for the proposed WWP acquisition. Our target price had been adjusted accordingly to S$2.36 (prev. S$2.31). We maintain our NEUTRAL call on FCT.

 

Figure 1: Key attributes of Waterway Point

Source: Company, PSR

 

Figure 2: Waterway Point

Source: RSP Architects

 

Figure 3: Trade area has one of the lowest retail mall floor space per capita in Singapore at 2.77sqft, compared to that of Singapore’s average of 5.9sqft

Source: Company

 

Figure 4: Strong tenant sales and footfall amid stabilisation phase

Source: Company

 

Figure 5: Gearing rises only marginally after the proposed WWP acquisition

Source: Company, PSR

 

Figure 6: WWP is expected to contribute c.16.5% of the total return of the enlarged portfolio

Source: Company

 

Figure 7: DPU accretion of 0.29% following the WWP acquisition, on a pro-forma basis

*Based on the Number of Issued & Issuable Units as at 30 Sep 2018

Source: Company, PSR

 

Figure 8: Growth of fringe retail rents have caught up and exceeded that of central retail rents the past year

Source: CEIC, PSR

 

 

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About the author

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Tara Wong
Research Analyst
Phillip Securities Research Pte Ltd

Tara covers the REITs and Property sector. Previously a consultant advising listed companies on their investor relations strategy, Tara’s transactions experience includes high-profile M&As, IPOs and privatisations.

She graduated with a Bachelor of Science (Honours) in Banking & Finance from the University of London.

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