Frasers Centrepoint Trust - Anchored to resilience in the heartlands

Dichotomy in the retail market. Suburban malls are resilient and hardly affected by the financial crisis. Even new suburban malls developed by sponsor Frasers Centrepoint Limited (FCL), such as Northpoint 2 and YewTee Point, are buzzing with activities. There is a change in behaviour with consumers visibly trading down to stretch every dollar.

On the other hand, shopping malls along Orchard Road suffer from a triple whammy. Local consumers are tightening their belts and are doing more shopping at suburban malls, which are nearer to their homes. Tourist arrivals have fallen (May 09: -13.0% yoy) due to outbreak of influenza A (H1N1) and the economic downturn. Last but not least, there is more competition with 1,384,000sf of retail space being added along Orchard Road this year.

Somerset - new hotspot along Orchard Road. Orchard Central has officially opened in Jul 09. It is Singapore's first vertical mall with 12 storeys above ground and was developed by Far East Organisation. 313 @ Somerset developed by Land Lease is still under construction. There is no direct competition as Orchard Central focuses on the youth market while 313 @ Somerset focuses on female shoppers. Existing The Centrepoint across Orchard Road is a family-oriented mall. The bigger cluster of shopping malls at Somerset could evolve into a major node, attracting more shoppers to the vicinity.

Consumer sentiment healthy even after GSS. Shopper traffic remains healthy in Jul 09 after Great Singapore Sale (GSS), which was held in May and June. FCT's suburban malls remain resilient with Causeway Point and Anchorpoint maintaining essentially full occupancy at 100% and 99.5%, respectively, in Mar 09. It achieved positive rental reversion in 1QFY09 with expiring leases renewed at 17.5% above preceding rental rates (27 leases signed). This has slowed to 7.3% above preceding rental rates in 2QFY09 (management explained that 2QFY09 is not representative as only four leases were renewed). Management expect positive rental reversion to be sustainable going into 2HFY09.

Earnings rebound in FY10 driven by Northpoint. Asset enhancement initiative (AEI) for Northpoint is already completed. Management expect occupancy to improve from 72.1% in Mar 09 to 100% by late-July, thus the full impact of AEI is expected in FY10. Average rent is projected to increase 20.0% to S$13.20psf while net property income will increase 29.5% to S$4.5m/quarter post-AEI. We expect revenue contribution from Northpoint to increase 30.3% to S$23.2m in FY10.

We believe management will probably not embark on AEI for Causeway Point this year given the uncertain economic climate.

Unlikely to suffer losses on revaluation. Management is confident that valuation will hold up when conducted in Sep 09 due to growth in rental income. In particular, there is room for valuation of Northpoint to increase due to AEI and subsequent growth in rental income. Gearing will, therefore, remain below 30%.

No refinancing risk. FCT has raised S$75m through its medium term note (MTN) programme in Jun 09. The cost of borrowings was 4.8% for 3-year funding on an unsecured basis. Proceeds from the fund raising exercise were utilised to repay revolving credit facilities, thus providing a more stable funding base.

FCT has a conservative gearing of 29.7% as at Mar 09. There is no refinancing risk as its commercial mortgage-backed securities (CMBS) of S$260m will mature two years later in Jul 2011. FCT has a healthy interest coverage ratio of 4.6x.

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