Frasers Centrepoint Trust - Highly Focused On Non-discretionary Consumer Spending

Suburban malls are more resilient. We conducted a site visit on 19 May 09 to Northpoint Shopping Centre located in Yishun, which was a lot more crowded compared to our last visit in Jan 09 (see our last update Anchor tenants have reopened at Northpoint dated 29 Jan 09). This reaffirms our view that suburban malls in the Housing and Development Board (HDB) heartlands are less affected by the economic turmoil. According to Frasers Centrepoint Trust (FCT), shopper traffic increased 7.9% yoy at Causeway Point, 7.2% at Northpoint and 8.6% at Anchorpoint in 2QFY09.

Retail sales index rebounded in Mar 09. Retail sales index for departmental stores and supermarkets recovered to +3.8% and +6.8% yoy respectively in Mar 09 after briefly entering negative territory in Feb 09. Anecdotal evidence suggests domestic consumption will continue to improve, going into 2Q09. A more buoyant retail scene will ensure renewal rates for leases expiring stay firm.

Earnings recovery driven by Northpoint. Net property income from Northpoint rebounded 31.3% qoq to S$4.2m in 2QFY09 with 80% of the enhancement works already completed. Occupancy rate at Northpoint recovered from 52.2% as at Dec 08 to 72.1% as at Mar 09. Management estimated that the asset enhancement initiative, which will be fully completed by Jun 09, will increase Northpoint's average rent by 20% and net property income by 30%.

FCT focuses on suburban malls located next to the Mass Rapid Transit (MRT) stations, which cater to non-discretionary spending by captive populations in HDB heartlands. Our target price of S$1.44 is based on the Dividend Discount Model (required rate of return: 7.7%, terminal growth: 2.5%). FCT provides 2009 distribution yield of 8.8% and trades at 30.9% discount to NAV/share of S$1.23.

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