• Maintain NEUTRAL and SGD2.35 TP (8% upside), c.5% FY24F (Sep) yield. Frasers Centrepoint Trust’s 1HFY24 DPU was slightly below our forecasts. Operationally, FCT continues to show robustness with very high occupancy and high single-digit rent reversions (similar to peers), which are expected to continue. Financing cost pressures will likely persist due to its below-average hedge position vs peers. The acquisition of an additional stake in the NEX retail mall is positive. We still recommend the add-on-dips strategy.

• Healthy uptick in 1HFY24 rent reversions at +7.5% (1HFY23: +4.3%) driven by its dominant malls and well-supported by higher tenant sales (2QFY24: +4.3% YoY), that are 20% above pre-pandemic levels (for Mar 2024). Retail portfolio occupancy remains at near-full levels (99.9%), while Central Plaza (office) occupancy dipped slightly to 93.8% (-2.7ppts QoQ). The SGD38m asset enhancement initiative (AEI) at Tampines 1 is on track to be completed by Sep 2024. The additional AEI space has received >99% pre-leasing commitment to date, with an expected ROI of c.8%.

• NEX acquisition contributions to fully kick in from 3QFY24. FCT completed the acquisition of an additional 24.5% stake in the mall at end-March. The acquisition is mildly accretive, but has room for growth from reconfiguration of tenant space and asset enhancements which are currently being executed, as well as further upside if tax transparency status is achieved on the mall income. Overall gearing edged up this quarter from a drawdown of debt to fund the acquisition, but remains comfortable at 38.5%. FCT’s next move, in our view, is likely to be the divestment of the Central Plaza office, which could provide over SGD200m in capital recycling for the REIT.

• 1HFY24 DPU down 2% YoY (c.49% of FY24 estimates), as higher revenue and NPI (same-store basis) were offset by higher financing costs. NPI margin slightly compressed YoY by 0.8ppts due to higher utility and maintenance expenses, but are expected to stabilise at current levels. Financing cost for 2QFY24 edged lower by 20bps QoQ to 4.1% as FCT repaid some of its higher cost loans from divestment proceeds. For the full year, management guided for low 4% levels. About 69% of its borrowings are currently hedged.

• We fine-tuned our FY24-26F DPU estimates by 0-1% by adjusting NPI margins on JV contributions. FCT has taken various sustainability initiatives over the last few years, such as installation of solar panels, food waste valorisation, water usage efficiency, and smart lifts which are expected to result in annual opex savings of SGD1m pa. As a result, FCT commands a high ESG score of 3.4 (above the country median), resulting in a 6% ESG premium embedded into our DDM derived TP.

Source: RHB Research - 26 Apr 2024