Wednesday, October 9, 2013

Frasers Centrepoint Trust : Gatekeepers of the North (DBSV)

Frasers Centrepoint Trust
BUY S$1.83
STI : 3,136.59
Price Target : 12-Month S$ 2.14 (Prev S$ 2.07)
Gatekeepers of the North

• Strong presence in the growing northern corridor
• Decentralisation is positive for suburban malls
• Acquisition of Changi City Point and possible expansion into Malaysia to drive longer term growth
• BUY for attractive valuations, TP S$2.14


Exposure to growing north. FCT’s two largest malls, Northpoint and Causeway Point, contribute c.80% to gross revenue. Rising affluence in the north as well as its sustained population growth bodes well for FCT, underscoring strong and sustainable organic rental growth going forward.

Portfolio of suburban malls limits downside risk. FCT’s portfolio of suburban malls attracts high recurring traffic from residents in the immediate catchment areas. Rental income from Bedok Point should remain steady despite competition from Bedok Mall due to its more attractive rents as well as the lack of new rental space in Bedok for the next 1-2 years.

Visible inorganic growth profile. FCT boasts of visible inorganic growth opportunities in Singapore and Malaysia, backed by its Sponsor’s history of readily injecting its retail malls into the REIT upon stabilisation. In Singapore, we expect FCT to acquire Changi City Point in FY14 upon approval of strata subdivision. Furthermore, we believe that the REIT has several interesting options to explore in terms of increasing its exposure to Malaysia, and this is a longer term catalyst for the stock.

BUY for attractive valuations and visible long term growth drivers. The stock is trading at 1.2 P/BV, which is reasonable given the attractive long term positioning of the stock. Furthermore, its dividend yield of 6.1% and 6.4% for FY13/14F is the highest among Singapore based pure-play retail SREITs. We have raised our TP due to a slight upward adjustments to our rent assumptions. Maintain BUY, with a DCF-based TP of S$2.14.

Yishun land tender by Sponsor a statement of intent. FCT’s Sponsor, FNN’s recent tender for two Yishun sites in Singapore has attracted some interest due to its S$1.43bn bid price, which was 47% higher than the second bidder. Questions have been raised about the feasibility of extracting significant returns from the development of the sites, but we believe that this can be taken as a signal of FNN’s (and FCT’s) confidence about the growth prospects of the northern region of
Singapore. We dug a little deeper into past as well as future developments within the estate, and we believe investors have reason to be excited about FCT’s expanding presence in the growing north.

The objective of this report is to highlight some of FCT’s key strengths going forward :
1. Causeway Point and Northpoint’s exposure to the growing northern corridor of Singapore
2. FCT’s exposure to the resilient suburban retail segment which underpins income stability, and
3. its inorganic growth profile via (i) the planned acquisition of Changi City Point in the next financial year, and (ii) potentially tapping into its Sponsor’s land bank in Malaysia for geographic expansion.

1. Exposure to the growing northern region.
Causeway and Northpoint are currently FCT’s two best performing malls, contributing c.80% to gross revenue. Both malls have been performing very well – Northpoint after the integration of Northpoint 2 in 2011, and Causeway Point after completion of AEI works earlier this year. Both malls are located at the heart of the estates that are being rejuvenated and growing. FCT has established an excellent execution track record regarding its malls in the north, and we believe that it is well positioned for future growth.

We highlight some noteworthy statistics and growth trends in Yishun, Sembawang and Woodlands, providing a solid basis for growth arising from FCT’s exposure to the growing north, and highlighting implications for Causeway Point and Northpoint.

a. Strong population growth
Woodlands and Sembawang driving northern population growth. According to Singstat, the northern region of Singapore (Woodlands, Sembawang and Yishun), has grown at a 12-year CAGR of 2.1% between 2000 and 2012, from 398k to 508k residents. Breaking down this number by estate, we note that apart from Yishun, where population CAGR of 0.5% lags significantly behind the national average of 1.3%, the resident population in the north of Singapore has been driven by Woodlands and Sembawang, which grew at a 12- year CAGR of 2.3% and 7.2%, respectively. In fact, the resident population CAGR for Sembawang is the third highest nationally, behind Punggol (19.2%) and Sengkang (9.3%).

The northern corridor is one of the three fastest growing estates in Singapore, alongside the northeast and west.

New developments in the area point towards population growth. Since 2010 (to Sep 2013), there have been c.16,000 HDB units launched in Sembawang, Yishun and Woodlands. Of the three estates, Yishun saw the most number of launches, with c.3600 units launched in 2013 alone. Based on the number of launches in these three estates, we expect c.53k residents to be added in the next 5 years, with HDB resident population growing by 5%, 18% and 16% in Woodlands, Yishun and Sembawang, respectively.

b. Rising affluence in the area
Condo launches bring winds of affluence to the north. Historically, a vast majority of residents in Yishun live in HDB apartments, averaging c.95% of the total resident population between 2000 and 2012. Looking ahead, we believe the residential profile will shift slightly towards more private housing.

Up to 2012, there were only 4 condominiums in Yishun –the last of which was completed in 2004 – resulting in a fairly stagnant condo resident population of 5100-5500 between 2006 and 2012. From 2013-2016 however, the number of condo residents will more than double as 4 new condos come onstream.

Outside of Yishun, we also note a significant volume of condos being completed from 2013 onwards – whilst the absolute number of units are not particularly eye-catching, they represent a doubling of condo units in their respective estates. In Sembawang, for example, the new condos will more than triple the existing condo stock, from 401 units to 1156 units by 2016. Woodlands will see an increase of nearly 75% in condo residents from 2012 figures.

c. What does this mean for FCT?
Outlook is bright for Northpoint and Causeway Point. The strong growth profile of the north bodes well for FCT, as it owns two of the most prominent malls there. As the catchment population grows, we expect that visitor traffic to the malls will increase in tandem, and so too tenant sales. Hence, FCT should be able to sustain decent reversion growth in the longer term. We have forecast annual rent growth of 3% p.a. for FY14 and FY15, keeping in mind that 99% of FCT’s leases have built-in rent escalations of 1-2% p.a..

Northpoint to benefit from the influx of affluence. The new condo additions to Yishun and Sembawang would lead to a more diverse profile of residents living in the area. This is good news for FCT, as Northpoint would not only have a larger catchment population leading to higher footfall, the new residents would also boost tenant sales as they typically have a higher level of discretionary income. Northpoint drawing in visitors living in Sembawang.

Despite the population growth in Yishun lagging behind the national average, retail sales in the area has been thriving, based on monthly rent psf of Northpoint as a proxy for retail sales. Rents at Northpoint have been growing at a CAGR of c.7.7% p.a. since 2006, from S$9.82 psf pm to S$15.90 psf pm today, surpassed only by the likes of Tampines Mall and Junction 8, which are both located in mature estates.

One reasonable inference that we can make is that Northpoint has been drawing residents from the neighbouring Sembawang area, which has been growing at the fastest pace outside of Sengkang and Punggol. In the last 12 years, the population of Sembawang grew at a CAGR of 7.2% p.a., from 32k residents in 2000 to 73k residents in 2012.

The closest mall to Northpoint is Sembawang Shopping Centre (SSC), which is managed by CMT. Relative to SSC, Northpoint boasts of better tenant diversity (180 vs. 70) as well as better accessibility, as the mall is located opposite Yishun MRT Station and next to Yishun Bus Interchange. The relatively superior positioning of Northpoint is evidenced in the annual visitor traffic - in FY12, Northpoint attracted 41m visitors, 8x the number that visited SSC (c.5m). We believe that with time,
Northpoint and Causeway Point could become the two malls that anchor the north, attracting shoppers from neighbouring estates in addition to servicing their immediate catchment populations.

Sponsor’s successful bid for Yishun land plot could bring future retail synergies. FNN recently announced its successful bid of S$1.43bn for a mixed-use plot of land next to the existing Northpoint. Fraser Centrepoint Land’s proposed development will include a residential and retail portion, and while it is still early days, we note that FCT could acquire the retail portion from FCL, assimilating the new retail area into the existing Northpoint ala Northpoint 2 in 2011.

If we include the new retail area, Northpoint’s NLA could potentially more than double to c.590k sqft, transforming it into one of the largest malls in Singapore. The expanded mall would be able to cater to the more diverse range of residents moving into Yishun. Until the new development is completed in 3-5 years time, Northpoint will be the only mall serving Yishun residents, and this can only strengthen FCT’s dominant position in the north of Singapore.

As a Sponsor-owned asset, the new retail area of the future mixed development presents a ready acquisition opportunity for FCT should FCL wish to divest it in the future. FCL has shown its willingness to inject its assets into FCT as demonstrated by Bedok Point in 2011, and it has indicated its intention to sell Changi City Point to FCT upon completion of strata title sub-division approval.

Newly revamped Causeway Point ready for the future. Causeway Point, which underwent AEI works from 4Q10 to 1Q13, was officially re-launched in August 2013. According to management, initial numbers from the newly revamped mall are very promising – average rent psf was S$13.53 in 3Q13, a c.35% increase from rents achieved pre-AEI. According to management, footfall has returned to pre-AEI levels, and retail sales have hit all time highs. The majority of pre-AEI leases have been renewed; hence any upside from rent increases in the near term is limited. That said however, the Woodlands estate is embarking on a very exciting growth path, and Causeway Point’s potential for further growth remains intact

Causeway Point to benefit from Woodlands Town integrated development that centralises community activity. On 3 August 2013, the government announced plans for a new integrated development in Woodlands. The new development will be located next to Admiralty MRT station, and will offer a
comprehensive range of facilities such as commercial shops, a hawker centre, childcare centre, senior care centre, and medical centre. We believe that the integrated development is positive for FCT and Causeway Point, as it would draw residents towards a more centralised location – a location that is just a hop and skip away from Causeway Point.

Causeway Point sitting at the future interchange station of new Thomson MRT line. Looking further ahead, Causeway Point sits atop the future interchange station of the North- South Line and Thomson Line. Slated for completion in 2019, the Thomson Line would make Causeway Point more accessible not just to Woodlands residents (via the Woodlands South and Woodlands North stations), but also to visitors travelling from more central areas in Singapore.

2. Stable performance of other assets
Outside of the north, FCT continues to see stable performances at Yew Tee Point, Anchor Point and Bedok Point. At present the Manager has no plans to undertake any major asset enhancement or tenant remixing as current tenants already have strong following and there is recurring traffic from residents in the area. In terms of performance, these three malls provide a high measure of stability to FCT due to their resilient nature.

In this section, we provide an update at how the malls are performing, and comment briefly about their respective outlooks.

a. Bedok Point: the worst is over.
Management actively repositioning Bedok Point in light of year-end opening of Bedok Mall. The opening of Capitaland/CMA’s Bedok Mall coincides with expiry of the first lease cycle at Bedok Point, and this has given the Manager the flexibility to bring in new tenants to improve the trade mix as well as relocate some tenants to improve visibility and accessibility.

The lower basement, which was previously under a master lease, will be replaced with an electrical/IT anchor tenant taking up 2/3 of the space. The Manager has guided that rents psf pm will likely be lower than that of the previous master tenant in light of competition from Bedok Mall, although this will be mitigated somewhat by the ability to rent out some of the corridor space.

Looking ahead, the Manager envisions Bedok Point as being complementary to rather than competitive with Bedok Mall. Although it is still too early for anyone to tell where the equilibrium will lie regarding visitor patterns in the long term, there are several factors that we believe are key in retaining tenants and in the near term: (a) the rent differential between Bedok Point and Bedok Mall, and (b) the lack of new space at Bedok Mall for the next 2-3 years.

Rent differential and lack of rental space at Bedok Mall key in retaining tenants. The Manager has made retaining tenants as its key focus. The current average gross rent at Bedok Point is S$11-12 psf pm, significantly lower than the estimated S$18- 19 psf pm at Bedok Mall, and going forward the Manager intends to keep rents at current levels in order to attract tenants that cannot afford the higher rents at Bedok Mall. This strategy has met with some success so far – the Manager
indicated that tenant attrition to Bedok Mall was lower than originally anticipated.

CMA reported that as of September 2013, Bedok Mall has already been 99% pre-leased, and this will limit the availability of new supply at the mall for the next 2-3 years. The Manager believes that “the worst is over” – tenants who wanted to move to Bedok Mall would already have done so, and going forward it is confident that performance at Bedok Point will be stable despite the more competitive outlook.

b. Yew Tee Point: upside from short leases
Healthy rental reversions. As of 3Q13, FCT has already renewed c.37% of the 44% that was up for renewal in FY13. The bulk of renewals were done in the last two quarters, and we note that reversions have been very healthy – in 2Q13, 23.2% of NLA was renewed at 11% above preceding rentals, and in 3Q13, a further 13.3% of NLA was renewed at 9% above preceding rents.

Lower occupancy for FY13 mitigated by higher rents. Occupancy rates fell to c.92% in 2Q13 and 3Q13 due to the departure of two fairly large tenants. We understand that one vacancy has been pre-committed, and that negotiations are ongoing for the other, and we have already factored the lower rental income from lower occupancies for FY13. We have forecast flat income for Yew Tee Point (YTP) in FY13, with the fall in income from lower occupancy rates mitigated by higher rents for existing tenants.

Short term leases at the atrium to supplement long term leases and attract shoppers. One strategy that the Manager will employ with regard to YTP will be to lease the atrium on a short term basis. Atrium leases tend to command higher rents than the longer term leases due to their prominent location, and they also add a novelty factor to the mall, keeping the mall fresh for visitors, and in turn attracting new traffic and maintaining recurring traffic.

3. Visible growth opportunities
Apart from the potential acquisition opportunity of the new retail space from FCL when the mixed development at Yishun is completed, FCT has several opportunities for inorganic expansion in the longer term, and this provides the stock with very visible potential catalysts.

a. Changi City Point slated for acquisition in FY14
Value to be unlocked. At c.200k sqft of NLA, Changi City Point is the largest dedicated retail outlet in Changi Business Park. We like this asset for (a) its exposure to the growing Changi Business Park, (b) its accessibility due to its close proximity to Expo MRT station, and (c) its close proximity to the Expo halls which attract visitors to the Expo conventions over the weekends.

At present, the trade mix by NLA comprises 40% for F&B, 50% for retail and 10% for services and entertainment. As the mall is still in its first lease cycle, we believe that there is substantial value to be unlocked from rental renewals and trade mix optimisation.

The mall is still in the process of attaining approvals for strata subdivision and will be fully injected into FCT upon receiving approvals. We expect the acquisition to be completed in FY14. Acquisition will be yield neutral in FY14, but accretive in FY15. In our current forecasts, we have estimated the acquisition will complete in FY14 and will cost S$400m, funded by 75% debt and 25% equity. Assuming an issue price of S$1.80, we have estimated that the acquisition will dilute the share base by c.56m units, representing c.7% of its current share base. Despite this, however, the acquisition should be yield neutral in FY14 and yield accretive in FY15.

b. Potential for further expansion into Malaysia
FCT can consider three options regarding increasing its exposure to retail malls in Malaysia, via (a) its 31% stake in Hektar REIT, (b) possible acquisition from its Sponsor, and (c) third party acquisitions. While the possibility of expansion into Malaysia outside of its investment in Hektar is low at the moment, we do note that
FCT has signalled its willingness to expand into Malaysia should the opportunity arise. This adds another avenue for inorganic growth that we believe is unique among the Singapore-based pure-play retail SREITs.

Investment in Hektar for exposure to suburban malls in Malaysia. FCT currently owns c.31% of Hektar which is listed on the Malaysian Stock Exchange, and is a passive investor. In 1QFY13, Hektar acquired two suburban retail malls in Kedah.

FCT is confident that, given the capabilities of Hektar’s Sponsor, substantial value can be unlocked from the malls via asset enhancements, adjusting the tenant mix as well as improving occupancies. Hektar’s dividend of c.S$3.8m for 9MFY13 represents c.5% of FCT’s total income. The Manager has indicated its interest in acquiring a higher stake in Hektar, a signal of its intent to keep Hektar as a long term investment.

Acquisition potential from Sponsor in the long term. FCT’s Sponsor FCL is currently constructing a RM1.6bn mixed development in Petaling Jaya, consisting of hospitality, office, retail and residential elements. The project, which commenced in June 2013, is a 50/50 partnership with F&N Holdings Berhad, and is expected to take seven years to be fully completed. Any acquisition of the retail portion of this development will be in the very long term, but we note that there are opportunities that can be reaped between FCT and its Sponsor, which has a land bank in Malaysia.

Any near term acquisition will be via 3rd party acquisition. As its Sponsor has no other development in Malaysia, any active expansion into Malaysia in the short term would have to be via 3rd party acquisitions. We understand that FCT is exploring acquisition opportunities in KL, Penang, and Johor.

4. Valuation and recommendation: Buy for growth
We like FCT for three reasons, namely its exposure to the resilient suburban retail segment which offers stability in earnings while limiting income downside risk, Causeway Point and Northpoint’s exposure to the growing northern corridor of Singapore, as well as inorganic growth opportunities. Looking ahead, we expect Causeway Point and Northpoint to continue to be the two key organic growth drivers for the REIT, with other malls remaining stable. The acquisition of Changi City Point in FY14 would also be immediately DPUaccretive. The stock is currently trading at FY13/14F DPU yields of 6.0%- 6.2%, the highest amongst Singapore-based pure-play retail SREITs. We have raised our TP due to slight upward adjustments to our rental assumptions. We maintain our BUY call, with a DCF-backed TP of S$2.14, which presents 16% potential upside to investors.



Source/Extract/Excerpts/来源/转贴/摘录: DBSV-Research
Publish date:08/10/13

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