Frasers Centrepoint: Poised for major league debut; upgrade to BUY

Physical integration a success. We visited Fraser Centrepoint Trust's Northpoint mall (NP) to assess the success of the S$38.6m asset works. The goal was two-fold: transfer GFA from the fourth level to higher yielding lower levels; and fully integrate the asset with new extension Northpoint 2 (NP2) to create one seamless retail mall. The physical integration has been very successful, in our opinion. It is very hard to identify where NP ends and NP2 begins. The transition out of AEI is still taking place on upper levels as some tenants are still in the process of fitting-out.

But trust-level integration incomplete. We have commented on the lack of scale in FCT's portfolio before and this is the most obvious opportunity: in essence, FCT owns only two-thirds of a prime asset. Despite a strong pipeline, FCT's acquisition plans were put on hold when the credit crunch struck. Sponsor FNN [NOT RATED] continues to hold on to NP2 (85,500 sf). We believe that an acquisition is likely in the next six months as: 1) credit markets have stabilized; 2) FCT has re-rated strongly making an accretive acquisition more feasible; and 3) the market may prefer an acquisition to support another potentially cash-flow disruptive AEI project (now at Causeway Point). The put and call option agreement with FNN indicates a price range of S$139.5m to S$170.5m for NP2. We currently assume the buy is priced per the Sep-08 valuation of NP, at around S$1916 psf or S$164m. Note that YewTee Point (YT, 72,000 sf) is also "ready for acquisition". If priced similarly, total acquisition cost is roughly S$302m.

Poised for major league debut. We have lowered our cost of equity assumption, changed our rent reversion assumptions from -5% and -7% inFY10-11 to 0% per year, and rolled over to FY10 (year end is 30 Sep). We also incorporate the NP2 and YT acquisitions at S$302m, with 70% of the cost funded via fresh equity at a 40% discount to the current price. This takes our fair value estimate from S$0.95 (at par to prior SOTP) to S$1.22.

We turn positive on FCT as 1) acquisitions will create scale, enhancing FCT's attractiveness for institutional investors (thus benefiting retail holders); and 2) the yield gap between FCT and CapitaMall Trust [HOLD; FV: S$1.53] is fairly wide even after allowing for a size and asset premium. Upgrade to BUY (16% total return). Our ideal entry point would be at any capital raising / acquisition announcement.

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