• Keep NEUTRAL, higher SGD2.30 TP from SGD2.12, 3% upside. Frasers Centrepoint Trust posted good set of 1Q operational numbers with a healthy occupancy uplift and positive rent reversions. Gearing has edged down to comfortable levels post recent divestments. It also managed to raise a fixed proportion of debt, taking advantage of the recent fall in lending rates. The current valuation of c.1x P/BV and FY24F yield of 5.4% broadly reflects the positives, though, and we recommend investors to buy on dips.

• Retail portfolio committed occupancy rose to 99.9% (+1.5ppts YoY, +0.2ppts QoQ) one occupancy improvements at Century Square (99.7%), Northpoint City North Wing (100%), and White Sands (99.8%). Management guided that overall rent reversions for the quarter well exceeded FY23’s +4.7%, and is likely to be in high single-digits. Tenant demand remained healthy from a combination of new, expansionary, and consolidation demand – with the F&B and wellness segments still being the key drivers – while overall supply remains modest. 1Q tenant sales saw a slight dip (-0.7% YoY) due to renovations by several key anchor tenants – excluding this, it was slightly higher at +1.1% YoY. Overall, tenant sales across FCT’s malls for 2023 stood at c.18% above pre-COVID-19 levels, which resulted in a healthy occupancy cost of c.16%.

• Refinancing cost pressures are easing off, with FCT noting that it had locked in its latest loan maturities at slightly below 4% levels (c.50bps lower than previous guidance). It had also increased its fixed rate proportion of debt by 10ppts QoQ to 73.1% of the overall. With this, the REIT has no refinancing due for the rest of the financial year.

• Room for acquisitions, with a lowering of gearing to 37.2% – FY23 (Sep): 39.3% – on the back of the Changi City Point and Hektar REIT stake divestments. This, in our view, allows FCT to selectively add up to a 10% stake in NEX mall (25.5% stake) from its sponsor at an estimated c.SGD210m without tapping the equity markets. In addition, with occupancy levels at Central Plaza now stabilising, we see the possibility of this being divested in FY24 – thereby adding an additional c.SGD200m-plus in funds, which could be recycled to further increase FCT’s stake in NEX.

• Tangible annual opex savings of SGD1m pa is expected from various recent sustainable initiatives being implemented – this includes the installation of solar panels, food waste valorisation, water usage efficiency, and smart lifts. These are positive steps in our view and shows long-term benefits to FCT from the adoption of good ESG practices. Consequently, we raise our ESG score by two notches to 3.4 out of 4.0, resulting in a 6% ESG premium. We have also fine-tuned our FY26F-27F DPU by lowering financing cost and COE assumptions by 30bps on the back of a stronger balance sheet.

Source: RHB Research - 23 Jan 2024