• Results within our expectations. Distributable income down y-o-y.
• Northpoint on track so far to achieve targeted 9% increase in rents post AEI; Changi City Point sees some light.
• 6.9% drop in tenant sales not expected to repeat.
• c.50% of debt expiring in FY17 refinanced.
• Maintain Neutral with increased DDM-derived target price of S$2.04.

What is in the news?

• Northpoint AEI on track; Changi City Point (CCP) sees light at end of tunnel. AEI works at Northpoint have been proceeding on schedule and are expected to complete by September 2017. Ongoing negotiations for post AEI tenancy suggest that management is still on track in achieving the originally targeted 9% increase in rental rates post AEI. Changi City Point saw double digit rise in footfall as a result of more mega shows held at the expo. Management expressed optimism at reversions for CCP for the remainder of FY17 amidst the impending opening of the DTL3 Expo station. Occupancies at other malls improved or held steady from previous quarter.

• 6.9% drop in tenant sales is worrying but expect better in coming quarters. Management attributed the drop in tenant sales (-6.9% excluding Northpoint) to the shortened window for shopping between Christmas and Chinese New Year in January. Part of the drop was also attributed to lower GTO component for 2016 (paid in 1Q17) from an anchor tenant at Causeway Point as a result of lower sales. While we are wary of the threat posed by ecommerce on brick and mortar stores, we retain our optimistic view for overall consumer spending this year as highlighted in our consumer sector report and believe tenant sales in the coming quarters should stabilise in the low single digit growth figures.

• Refinanced c.50% of debt expiring this year. A S$90mn term loan expiring this FY has been refinanced by a similar quantum 2.365% Medium Term Notes (due 2020). FCT’s finance expense dropped 5.2% y-o-y which could be a result of the falling 3m SOR from the high of 1.427% in December 2015 to 0.875% currently. 57% of borrowings are hedged on fixed rates. As a result of the slower than anticipated rate of increase in interest rates, we revise downwards our forecasted financing expenses for FY17 onwards, which leads to a new forecasted DPS of 12c each for FY17-FY19, from an average of 11.8c previously.

Investment Action

Trading at a yield of 5.6% (lower than post GFC average of 5.75%) and Price/NAV of close to 1x, we think FCT is trading at fair valuations, given the structural challenges facing the retail industry, that is the increasing adoption of ecommerce. We maintain our NEUTRAL call, with an increased DDM-derived target price of $2.04 as a result of downward revised finance costs.