Intact fundamentals with falling share price provides attractive entry
Despite delivering a higher YoY DPU with improved shopper traffic and tenant sales, the share price of FCT has fallen since its decent 4Q15 results. We acknowledge that the decline is broad-based across the REITs sector due to increasing expectations of a Dec-15 rate hike. However, we have already downgraded FCT to HOLD in June 2015 by factoring a higher risk free rate assumption. We think that the stock has currently over corrected as it trades below our TP.
Good delivery record
We like FCT for its stable profile anchored by Causeway Point (CP) and Northpoint (NP). Between FY07-FY15, FCT has a consistent track record in increasing DPU at an impressive CAGR of 7.4%. With a low gearing level of 28.2%, FCT does not have a large exposure to interest rates while it maintains a large debt headroom for acquisitions.
Seeing positives in FCT’s retail environment
In spite of the slowing retail environment, FCT still manages positive rental reversions of 2.5%-10.9% for every quarter since 1Q14. Recently, we are seeing signs of green shoot. Bucking the trend of declining shopper traffic between 4Q13-1Q15, FCT reported improvements over 2Q15-4Q15 coupled with stronger tenant sales. Meanwhile, Singapore retail sales SA (Ex Motor Vehicles) strongly rebounded in August, with the index at the highest level since March-2013.
Potential catalysts for rerating
We think that FCT may refinance the S$278m short-term borrowings at more favourable rates, which we estimate is financed at ~3% interest costs. In the most recent result, FCT also announced that AEI at Northpoint will commence in Mar 2016. Potential catalysts for rerating include a stronger reversion and occupancy at Changi City Point, which stands to benefit from completion of MRT works. Acquisition of Waterway Point is also likely to be in the pipeline.
Upgrade to BUY on 6.1% yield with TP of S$2.03 unchanged
We upgrade FCT to BUY as it offers an attractive 6.1% yield with a stable profile, has potential rerating catalysts while it trades below its book value of S$1.91. We are not overly concerned over rising interest rates as our assumption of 3.1% is still above the 10Y Singapore bond yield, which trades at 2.6%. (Read Report)
Source : KGI Fraser Research