• Upbeat on long-term prospects
• Reiterate Outperform (2)
■ What's new
We had a meeting with FCT management on 3 August 2015. Its general tone was cautious but confident, particularly for the medium to long term. We reiterate our Outperform (2) rating on the stock.
■ What's the impact
Management admitted that the retail market has weakened in 2H FY15, but believes that the YTD rental reversion of 6.2% should hold up for the current financial year. The rental reversion for 3Q FY15 was 5.3%. The malls that pulled down the average for the quarter were Causeway Point (rental reversion of 1.0%), due to negative rental reversion for 1 large lease that would have been difficult to carve out into smaller retail spaces, and Anchorpoint (rental reversion of -5.1%), with only 2 renewals done (and the dominant one negative).
FCT’s 3Q FY15 results were not all rosy. The portfolio occupancy rate slipped QoQ to 96.5% as at 30 June 2015 from 97.1% as at 31 March 2015. Bedok Point’s QoQ decline in occupancy rate (to 84.9% from 94.2%) was caused by the departure of K Box Karaoke, which had occupied 9% of the net lettable area. Although the occupancy rate in Changi City Point (CCP) improved QoQ to 92.4%, management said the mall’s configuration had persistent vacancies of 5-6% and it is still studying the changing traffic patterns to match the right tenant with demand. Management is ‘iterating on the tenant mix’ and said CCP, with a current passing rent of less than SGD10/sq ft per month, can improve its passing rent to SGD10-12/sq ft in the ‘longer term’.
Management remained upbeat on the inherent strength of its portfolio. It classifies its largest malls, Causeway Point and Northpoint, as ‘quality regional malls’ that generate over SGD100/sq ft per month in sales, well above the benchmark of SGD60-80/sq ft per month for a typical Singapore suburban mall, according to property consultant Urbis. These 2 malls make up over 71% of FCT’s portfolio value.
Management’s internal asset-size target over the next 3-4 years is SGD5bn (vs. SGD2.4bn currently), with most of the external growth coming from its sponsor’s pipeline. We regard the largest and most visible acquisition target as Northpoint City, which could be acquired in 2019. Our ballpark valuation for the retail component, which will be integrated with the current Northpoint, is SGD1bn. Outside Singapore, FCT could eventually acquire some of its sponsor’s retail assets in Australia.
We make marginal changes to our distribution-per-unit (DPU) forecasts post the 3Q FY15 results (announced on 22 July 2015), which were in line with our estimates. We do not change our DDM-derived 12- month target price of SGD2.26.
■ What we recommend
We reiterate our Outperform (2) rating. Although the retail property sector faces its own headwinds, we believe FCT’s portfolio will stay resilient and its DPUs are likely to remain among the most consistent in the entire sector. A negative risk to our call: extremely weak rental reversions in coming quarters.
■ How we differ
FCT is still our top sector pick and we believe its defensive nature could shine during periods of market uncertainty. (Read Report)
Source : Daiwa Capital Markets