On good footing to command rental growth. Hybrid work arrangements should benefit FCT’s malls, which are located near transportation nodes. Commute-driven footfall and incidental spending should see an uptick, lifting tenant sales and GTO revenue for FCT. Occupancy cost, at c.16-17%, is at the 5-year pre-pandemic average. Improving tenant sales should lower occupancy cost further, which may support FCT’s ability to raise rents. Utilities represent c.7% of property operating expense and are fully hedged for FY22. Energy contracts will expire in end-FY22 and mid-FY23.
Maintain ACCUMULATE, TP lowered from S$2.71 to S$2.38
No change in DPU estimates. Our DDM-TP is lowered from S$2.71 to S$2.38 as we increase our cost of equity from 6.41% to 7.08% on a higher risk-free rate assumption. P/NAV of 0.98x, which is trading near 5-year lows at -1 standard deviation level, might seem cheap. However, we think this is fair given the rising interest rate environment. The yield spread (dividend yield – 2 years Singapore government bond yield) has fallen from over 4% at the start of the year to 2.65%, and we expect this to fall even further as well. The current share price implies a FY22e DPU yield of 5.7%.