Not vested. From DMG:-
Frasers Centrepoint Trust: Acquisitions: New engine for growth (BUY\S$1.14\Target S$1.53)
Jonathan Ng (62323893,
[email protected])
Maintain BUY for its defensive strengths.
Since July, FCT has been one of the best S-REIT performers with yields compressing by 100bps. We believe the major reason is that FCT is one of the most defensive plays among other REITs. Apart from its low stock beta (0.7x), FCT’s well-positioned portfolio of suburban retail assets offer a high degree of stability in terms of occupancies and cash flows.
Its anchors are primarily dominated by non-discretionary retailers with an eclectic mix concentrated towards F&B and mass-market merchandising.
We are raising our TP to S$1.53 from S$1.17.New asset injection will raise AUM by 28%. Our discussion with management yesterday was largely centred on its acquisition plans. We expect Northpoint 2 and YewTee Point to be acquired within the next 12 months. We value both assets at ~S$300m, with NPI yields averaging between 5.7-6.1%, above its WACC cost of 5.2%. With the acquisitions, FCT’s AUM will grow by 28% to S$1.4b by end-2010.
FCT has a robust balance sheet with no debt due for refinancing until Jul 2011 when its S$260m CMBS matures. Its S$58m RCF will be paid down using its MTN proceeds, bringing overall gearing to 29.5%. With a current equity cost of 6.2%, we believe acquisitions will likely be funded using both debt and equity. We understand that secured debt has an interest cost of ~3.8%. We estimate a 50:50 equity/debt combination will improve DPU yield by 40-60bp, whilst lifting gearing to only 32.4%.
Target price lifted to S$1.53. The acquisition of these malls is expected to be accretive and will strengthen FCT’s retail oligopoly status in the northern region of Singapore. With an expanded AUM and equity base, concerns over FCT’s poor stock liquidity will be addressed. We expect a further re-rating on the stock as yields could compress closer to its 5% heyday levels seen in 2006-08.
Our new TP accounts for the two acquisitions based on the above assumptions. We raise our terminal growth to 2.5% from 1%, considering that these assets have an annual 2-3% step-up rent agreement. At our TP, FCT trades at 5.5% FY11 yield, a reasonable peg, in our view.
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