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.

Sponsored Links

Frasers Commercial Trust - Value amid recapitalisation

While Jones Lang La Salle estimates that Singapore capital values to June 2009 have fallen 37.9% since the market peak in 4Q07, the office market appears to be exhibiting signs of life in recent weeks. K-REIT Asia on 1 September announced the acquisition of six floors (20/F-25/F) office property Prudential Tower (leasehold with about 85 years remaining and total strata area of 248,541 sq ft) along Cecil Street in the CBD area from APF Property Investments for S$106.3mn or S$1,579psf of NLA.. The vendor will provide income support to K-REIT, capped at an aggregate S$5mn, for five years upon the completion of the acquisition to guarantee a NPI yield of 5.2% (S$5.5mn a year) over the five-year period. The transaction is the first significant deal in the Singapore CBD area since the reported sales in May 2009 of Anson House for a reported S$85mn (equivalent to S$1,100/psf) and Parakou Building for S$81.4mn (equivalent to S$1,280/psf). In addition to asset divestments/acquisitions, it has been reported (The Edge, 31 August 2009) that Servicorp would lease an entire floor (22,000sf) in Marina Bay Financial Centre Tower II with a seven-year lease commencing in 2010.

The recent 2Q09 GDP report for Australia revealed that business investment contraction was briefer and much smaller than expected by our economics team and that consumer spending was holding up much better than previously forecast. As a consequence of the better-than-anticipated 2Q09 GDP number, Nomura’s economics team has lifted Australia’s 2009 GDP growth forecast to 1.0% from -0.2%. Nomura’s economists have also adjusted its 2010F growth forecast to 1.9% from 1.8%, while maintaining its 3.0% forecast for 2011F. Key drivers to the revised forecasts are an expected stronger contribution from domestic demand and less support from net exports. With the better economic outlook, Nomura’s economists have revised peak unemployment forecast to 6.8% in 2010F (from 8.1% previously).

While the economic outlook appears to be improving, the 2Q office data highlight a marked contraction in demand in the Australian office market resulting in a broad uplift in office vacancy. According to the Property Council Australia, net demand contracted by 160,284sm, resulting in vacancy rising in the first six months of 2009 to 8.3% from 5.9% as at the end of 2008. Vacancy in Australia’s main CBD market rose to 7.3% by end-June from 4.7% at end-2008. While demand in the respective office markets remained weak, the rising in vacancy was partly prompted by the completion of nearly half a million square metres nationwide.

FCOT in August 2009 raised S$213.9mn via the issuance of 2,252.0 mn new rights units at S$0.095/units. In addition to the issuance of new equity, FCOT has acquired a 99-year leasehold interest in Alexandra Technopark from parent Frasers and Neave for S$342.5mn, funded by way of the issuance of preferred equity. A five-year master lease, as part of the deal, will ensure a net rental of S$22.0mn, equating to a net yield on our numbers of 6.4%. The preferred equity attracts a coupon of 5.5%, equivalent to S$18.8mn per annum. A full conversion of the preferred equity at a conversion price of S$0.177/unit would result in the issuance of further 1,933.0mn units. Following the transaction, the REIT manager estimated that its gearing would fall to 0.465x post the rights issue, falling to 0.385x following the acquisition of Alexander Technopark. On our numbers, we are forecasting end-FY09 gearing to come in at 0.41x vs our previous estimate (pre transaction) of 0.62x. FCOT in its circular indicated that its NAV would fall to S$0.26/unit, following the rights issue from S$0.78/unit based on its 1Q09 results. If the preference shares were fully converted the NAV would fall to S$0.23/unit.

While signs of life are appearing in the Singapore office market, tough market conditions remain in both the Singapore and Australian office markets. That said, we continue to see value in FCOT, with market conditions more than reflected in our asset valuations. Following its recent recapitalisation, we reset our price target to S$0.184/unit (down from S$0.29/unit) to reflect the increased number of shares, as a consequence of the S$213.9mn rights issue and the potential dilutive effects of conversion of preferred equity. Following the rights issue as well as the acquisition of Alexander Technopark on a yield of 6.4%, we raise our distributable income to S$26.2mn for FY09F (from S$22.8mn) and to S$44.6mn for FY10F (from S$18.4mn). While distributable income has been raised, our DPU for FY09F and FY10F are cut to S¢1.8 and S¢1.5, respectively (due to the rights and preferred equity issuance) resulting in a prospective FY09F and FY10F yield of 11.0% and 9.2%, respectively.We retain our BUY recommendation on FCOT.

Fraser Commercial Trust - Revenue in 2Q09 came off 17.9% from a year ago

Fraser Commercial Trust (FCOT) reported results for 2Q09. FCOT recorded gross revenue of $22.7 million (-17.9% yoy, -5.4% qoq), net property income of $17.7 million (-18.0% yoy, -5.2% qoq) and distributable income of $5.6 million (-67.6% yoy, +2.8% qoq). DPU for the quarter is 0.73 cents (-69.6% yoy, flat qoq). FCOT will be paying out a 1H09 DPU of 1.44 cents.

Portfolio performance. Revenue in 2Q09 came off 17.9% from a year ago. We can also observe the trend of revenue. It can be observed that much of the decline came from the Australian properties. From 1Q08, Australia contribution dropped 24.7%, Singapore contribution dropped 17.8% and Japan contribution dropped 14.5%. The main reasons for the dismal performance from Australia were due to the termination of income support of Central Park in 3Q08 and also the unfavorable foreign exchange movement of the AUD. For Singapore, contribution was affected in 2Q09 due to the cessation of income support of Key Point in 2Q09. Japan contribution was affected in 2Q09 because of underperformance of Cosmo Plaza. Revenue contribution by percentage for 2Q09 is 42.8% (Singapore), 40.6% (Australia) and 16.6% (Japan).
After the recapitalization, gearing will be reduced to 38.5%. NAV per share is diluted to approximately $0.26. $179 million from the rights issue will be used to repay existing debt. The remaining balance of debt will be refinanced with two new facilities for a further 3 years. Total debt after refinancing is approximately $804 million.

Valuation and recommendation. The recapitalization exercise has shown the commitment of a strong sponsor backing FCOT in rebuilding its balance sheet. We expect to see a stabilization of revenue from the portfolio. The addition of Alexandra Technopark, which is under a master lease, will provide a stable rental income to FCOT. Together will China Square Central, gross rental income under master leases is approximately 38%. We revise our assumptions to account for the recapitalization and also make changes to our revenue forecasts. We forecast FY09F DPU to be 2.3 cents and following full dilution in FY10F, DPU falls to 1.2 cents. We believe the transformation of FCOT undertaken by the management will take time to crystallize.

The first phase of transformation is now completed. The second phase would be the rebalancing of the investment portfolio and we think the management team has the experience and expertise to execute their stated strategy. Our post-rights fair value is $0.125. At the previous day closing price of $0.195, we think market has not factor in the dilution due to the rights units. Maintain sell recommendation.

Frasers Centrepoint Trust - Positive Surprise in 4QFY09

Results in-line with consensus — FCT reported DPU of 1.94 cents in 3QFY09. In addition to the 3.53 cents paid in 1HFY09, 9MFY09 DPU amounted to 5.47 cents. This is about 75% of consensus estimates and 68% of our estimates. However, we think the Street is neglecting the impact of the NPI contribution from Northpoint AEI.

Positive surprise in 4QFY09 — The AEI for Northpoint (NP) was completed as of Jun-09 but will only be fully operational by Jul/Aug this year. Management has conservatively guided that the NPI for the quarter will be about $4.5m. For 3QFY09, reported occupancy for NP rose just 3%pts qoq (72% to 75%), but NPI rose 35% qoq. As at Jun-09, 97% of NP is leased or under advanced stages of negotiation. In addition, 4QFY09 has seasonally been the strongest, as it coincides with the Great Singapore Sale. FCT has also progressively added a GTO component to most of its leases.

Issued $75m notes — In Jun-09, FCT has issued $75m 4.8% fixed rate notes due in 2012 under its MTN programme. Some $22.5m short-term loans were refinanced during the quarter with the proceeds, with the remainder used to pay down the $57.5m outstanding in 4QFY09. Gearing ratio rose to 32.7% as at end-Jun but will revert back to below 30% post the repayment in 4Q.

Maintain Buy — We maintain our above consensus estimates for FY09E and view that 4QFY09 could surprise the Street on the upside. We like its exposure to the resilient suburban malls. At current price, FCT still offers yields of over 8%, higher than CapitaMall Trust.

Frasers Centrepoint Trust - suburban mall resilience continues to shine

FCT reported 3Q FY09 DPU of 1.94 cts (+3% YoY, +4% QoQ), bringing 9M09 DPU to 5.47 cts, in line with our and consensus’ full-year forecast of 7.3-7.6 cts. With AEI at Northpoint completing, we expect more contribution in 4Q FY09.

Suburban mall resilience continues to shine as: 1) FCT achieved 14% rental reversion over preceding rents on renewals; mainly from CWP; 2) revenues increased 2% YoY to S$21.2 mn and NPI margins improved on cost control; 3) occupancy remains steady at 93% despite ongoing AEI at Northpoint, 4) occupancy costs remain healthy at 14-16%, well within market benchmarks.

Recently-issued MTN should bring gearing to below 30% and push out refinancing needs till July 2011. Acquisition growth from sponsor’s strong pipeline could be a medium-term catalyst.

We have fine tuned our FY09-11 DPU forecasts by -1-0% to adjust for slower Northpoint AEI completion but better margins. We raise DDM-based target price to S$1.18 (from S$0.77) on lower cost of equity. Trading at 0.8x book of S$1.23, and 7.5% DPU yields.

Frasers Centrepoint Trust: Boring But Defensive

3QFY09 results in-line with expectations. FCT reported a 3.2% YoY gain (+4.3% QoQ) in 3QFY09 DPU to 1.94¢. Annualised DPU of 7.3¢ came in slightly ahead of our forecast but in-line with consensus. FCT will trade ex-3Q09 distribution on 30 Jul 2009. Price target raised to S$1.17 (S$0.83 previously) to reflect a lower cost-of-equity assumption of 7.5% (9.5% previously) and terminal growth rate of 1% (nil previously).

Who says boring is bad? Apart from its resilient suburban portfolio, FCT stands out among the S-REITs as one of the least aggressive in terms of acquisitions. On hindsight, we think management has been among the most effective in terms of preserving the stock’s theoretical valuation through its strong asset enhancement initiatives and cautious acquisition stance. With that, FCT continues to boast commendable financial credit metrics and a strong balance sheet, which does not warrant any dilutive equity capital raising in the foreseeable future.

Resilient portfolio with limited downside. At current prices, FCT offers investors a dividend yield of 7% for FY09 and 7.2% for FY10. Causeway Point and NorthPoint, which contributes to 92% of NPI, are suburban malls which are resilient even during periods of recession. FCT has a strong balance sheet with gearing of 32.7% and interest cover of 4.5x. As all acquisitions are put on the backburner, there is no need for any equity raising in the near-term.

Low beta and high earnings resilience justify lower COE assumption. Like most REITs, FCT has risen sharply (+75%) since Mar 09, providing a forward yield spread of 470bps above riskfree instruments, 110bps above its historical 360bps average. Despite the sharp increase, we think a forward yield of 7.2% continues to underscore our BUY justification on the counter. This is in view that FCT has one of the lowest betas (0.75x) among S-REITs, which typically average 1.1x. The relative stability of the stock price justifies a lower cost-of-equity assumption, hence higher theoretical fair value. Stock still undervalued at current levels. Trade stock to S$1.17 (~6% yield).

Frasers Centrepoint Trust: 3Q NPI boosted by Northpoint

Pays out 1.94 S cents. Frasers Centrepoint Trust posted S$21.2m in gross revenue, up 1.8% YoY and 0.5% QoQ. The REIT will distribute S$12.1m to unitholders, up 4.1% YoY and 4.4% QoQ. The YoY and QoQ improvements in distributions are due to a 100% payout this quarter versus a 95% payout in 2Q09 and 3Q08. Excluding the payout difference, distributions would have slipped. Results beat our expectations.

3Q NPI boosted by Northpoint. Causeway Point (CP) and Anchorpoint registered a 7% and 7.7% QoQ drop in net property income (NPI) respectively in 3Q09. Margins fell as revenue recorded smaller QoQ changes of -3% and 0.2% at the two properties. AP also saw occupancy fall from 99.5% three months ago to 93% though the manager did say committed occupancy stands at 97.2% there as at June. The erosion in NPI at these two properties was offset by gains at Northpoint, where asset enhancement (AEI) work is finally drawing to a close. The combination of rising occupancy and higher post-AEI rents led to a 35% QoQ increase in NPI at the mall. Consequently, net property income was up 0.1% for the overall portfolio.

What next? 97% of NP's NLA has already been leased or is in advanced stages of negotiations with tenants. The manager is projecting a 20% increase in average rents at the mall from S$11 per square foot per month to S$13.20 psf pm. This should flow through to 4Q09 results. Meanwhile, FCT issued S$75m 3-year fixed rate notes in June, which it will use to repay short-term debts. Gearing is expected to consequently fall to below 30%. AEI plans at CP, which were postponed, could potentially be resurrected now that the macro picture and credit market look to be stabilizing. But CP is the portfolio's key revenue driver and investor appetite for DPU stability may be a constraint. Meanwhile, the manager said two malls in the pipeline were "ready for acquisition". Financing and pricing of any acquisition is still a question mark, however, in our opinion.

Valuation. We have increased our earnings estimates to reflect the positive rental reversions achieved in 9M09 as well as the post-AEI support from NP. We still expect declines in achieved rent in FY10, however. We are also lowering our cap rate assumptions by 40 basis points. Our new fair value estimate is S$0.95 (prev: S$0.75), at par to our SOTP value for FCT. We are estimating yields of 7.2% and 7.7% in FY09 and FY10. Maintain HOLD.

Frasers Centrepoint Trust: Stability and Growth

Northpoint AEI is almost completed. Asset enhancement works (AEI) at Northpoint is expected to complete soon with tenants currently fitting out their premises. Committed and leased out space accounts for c. 94% of total net lettable area (NLA). Post completion, FCT¨s net property income (NPI) will be lifted by 7% from FY10 onwards.

Portfolio exhibits resilience. FCT has (i) secured c.96% of FY09 income, and (ii) maintained positive rental reversions albeit at a tighter spread, given the tough operating climate. Renewals in 3Q09-FY10 account for c.15% of rental income, mostly from Causeway Point, its largest asset. We expect renewal activities to remain stable given strong pedestrian traffic at FCT¨s various malls.

Asset injections are a possibility in the medium term. Based on latest closing share price, FCT is trading at an implied property yield of c6.3% -6.8%, which is reasonable against its property yield of 6%. However, it remains higher than our estimated 5.0% -6.5% NPI yield for its targeted asset, Northpoint 2, based on valuation detailed in its put-call option back in Oct 07. While management remains keen to inject this asset, they have re-iterated that any deal would have to be yield accretive to the portfolio and to unitholders. In addition, other than Northpoint 2, Yew Tee Point, another sub-urban mall, has recently been completed. If these 2 assets are injected into FCT, its portfolio NLA could potentially grow by up to c.23%.

Maintain BUY, TP S$0.97. FCT currently offers an absolute return of 18%, backed by a stable FY09F-10F stable yield of 8%. Further re-rating catalysts will hinge on asset injections.

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.

Fraser Commercial Trust - Doing The Inevitable; Still . . . . .

FCOT, formerly known as Allco Commercial Reit, has done the inevitable: 3-for-1 rights at 9.5 cents to raise $205.5 mln net of expenses. F&N will subscribe for its 22.2% entitlement. It will underwrite up to a further 10.5% for a total subscription of up to 32.7%. (The discount to the theoretical ex-rights price, TERP, of 13.1 cents, based on the last traded price of 24 cents, is 27.6%, which is in line with recent rights issues.)

In addition, FCOT has announced the following: The acquisition of Alexandra Technopark (with net lettable area of 1,048,607 sf) from F&N for $342.5 mln, payable via the issuance of 5.5% convertible perpetual pref units (CCPU) to F&N.

(The CPPU is redeemable strictly at the discretion of the trustee of FCOT, and convertible at the discretion of the holders, three years from the date of issue. The conversion price will be 17.685 cents, which is 30% premium to TERP. F&N will re-offer the CPPU to the unit-holders of FCOT within 6 months of the issue, subject to F&N retaining at least 40% of the opitstanding at all times, until repayment.)

FCOT will then enter into a Master Lease agreement with Fraser Centrepoint for a period of 5 years at a fixed annual net rental of $22 mln for a yield of 6.4%.

Banking facilities of $675 mln (S$500 mln + A$150 mln / S$175 mln) from a consortium of banks to refinance $624 mln existing loans due in H2 ’09. We believe the new facility, which has taken a bit of time, is because of FCOT’s improved balance sheet, especially after the property acquisition, as the nominator, which is debt, remains unchanged, while the denominator, which is total assets, grows.

1. While the debt overhang, which has made FCOT the worst performing reit, may have been removed, we believe there is limited upside. (FCOT’s gearing will drop from 58.3% as at Mar ’09 to 38.5%.)

2. The key question is why acquire an industrial property, when FCOT’s portfolio is presently made up of office and retail assets in Singapore (China Square, 55 Market), Australia and Japan.

Frasers Commercial Trust - Impending equity/asset injection

Prior to the impending refinancing of its S$550mn in debt due in July 2009, Frasers Commercial Trust (FCOT) opted to revalue its portfolio booking a net revaluation deficit of S$143.6mn. With the revaluation deficit (FCOT’s revised book value is now at S$0.79/unit), gearing rose to 0.58x at end-1Q09. On our numbers, gearing is likely to increase further given the likelihood of further asset revaluation deficits as market asset values fall. According to JLL, since the market peak, capital values have fallen 27.6%, although further downside risks remain, given the slide in rents. Recent transaction and valuation evidence in Singapore suggests that office values are down by around 35% since the peak. In May 2009, Anson House was reportedly sold for S$85mn (equivalent to S$1,100/psf) down from S$129.5mn (S$1,701/psf) achieved in 4Q07, a fall of 34.4%. Similarly, Parakou Building was recently sold for a reported S$81.4mn (equivalent to S$1,280/psf) down from the S$128mn achieved in 2Q07, equating to a fall of 36.4%. While FCOT has booked revaluation deficits on its Singapore properties, ie, its Keypoint office building at S$294mn (equivalent to S$941/psf) versus its acquisition price of S$370mn in 4Q07 (S$1,186/psf), a fall of 20.5%, the write-downs to date may still not be enough. On our numbers, we expect FCOT to book a further revaluation deficit of S$247mn, pushing gearing to 0.73x. While technically not in breach of the Monetary Authority of Singapore’s (MAS) guidelines (as the rise in gearing is driven by the deterioration of the asset base rather than an increase in gross borrowings), refinancing of its current debt, in our view, will be dependent on addressing gearing concerns.

While FCOT is looking to divest assets — notably Cosmos Plaza and its interest in AWPF — at best, we estimate FCOT will raise S$85mn, from this disposal, which would only modestly bring gearing down to 0.56x (vs 0.62x projected for end FY09). We believe the REIT will need to do more; consequently, we believe a rights issue or asset injection from the parent is likely.

On our numbers, FCOT will need to raise S$440mn to address the dual issue of declining asset valuations and rising gearing. As an alternative to a straight capital raising it is possible that parent Fraser and Neave (F&N) could inject assets from its own portfolio, potentially the original seed assets it intended for its own sponsored REIT. The subject assets that F&N originally intended to inject into a standalone REIT were Alexandra Point, Alexandra Technopark and Valley Point (office and retail), with an estimated value of around S$600mn. Assuming two of the three assets are injected at a value of around S$440mn, FCOT REIT’s gearing could potentially fall from 0.62x to 0.40x. The offset to this would be a dilutive equity issuance. On our numbers, this would be dilutive by about S$0.19/unit (assuming stock was issued at a modest discount to the current share price), with FCOT markedly increasing its stake in the REIT from a current 22%. It seems plausible that a combined asset injection and rights issue will be proposed, checking the parent’s stake (Fraser & Neave) to below 50%. While technically the scenario would trigger a general offer (GO), we believe FNN would seek a GO waiver prior to the execution of the transaction.

We have revisited our earnings numbers and have marginally cut our DPU forecasts for FY09-FY11 by 2-5% to reflect expectations of higher vacancy in the group’s Singapore portfolio given the greater-than-expected contraction in net demand in 1Q09. Not withstanding the changes to our occupancy assumptions, we have rolled forward our intrinsic NAV to FY10 with our new value S$0.48/unit (vs S$0.47/unit), with the lift driven by higher translated values from the REIT’s Australian and Japanese assets, in spite of more conservative cap rate assumptions for the group’s Australian assets.

While our core NAV is not adjusted significantly, our valuation methodology incorporates the potential for dilutive capital raising to check gearing at 0.40x. On our numbers, as discussed above, we see FCOT having to make a further asset writedown of S$247mn as discussed earlier, which could drive gearing to 0.73x, higher than the MAS’ limit of 0.60x. Note: a REIT is not considered to be in breach of the 60% gearing limit if it is attributable to depreciation in the value of the REIT’s assets. We assume that FCOT will need to raise additional equity of around S$440mn to keep gearing below 0.40x. We now assume that this equity will be raised at S$0.22/unit, a modest discount to the current unit price (vs S$0.17/unit previously, which was the unit price at the time) so the theoretical capital raising would have a lower dilutive impact than we had previously adjusted for, ie, S$0.19/unit (vs S$0.23/unit previously) resulting in our price target being raised to S$0.29/unit (from S$0.24). We have highlighted in previous notes that FCOT faces a number of issues, with the deteriorating office market compounded by translation losses and higher funding costs. While FY09F looks challenging, expectations of a resolution of refinancing issues (in part supported by parent Fraser & Neave as discussed above) should provide a much needed catalyst for re-rating of the stock and we retain our BUY rating.

Frasers Centrepoint Trust: Is the pipeline ready for resuscitation? Not just yet.

FCT up sharply YTD. Frasers Centrepoint Trust (FCT) is up 51% YTD and is now trading at 0.74x book. A buy rationale at this price level implies, in our view, expectations of growth either through 1) the re-rating of existing assets, which we don't see much economic evidence for, or 2) through value-accretive acquisitions.

Opportunity in pipeline. FCT is comfortably geared at 29.7%. It also does not have to look far for potential deals: recall that FCT has a pipeline of four retail malls from sponsor Fraser & Neave [FNN, NOT RATED] under a right of first refusal (ROFR). We believe the ROFR, which expires in 2011, has been a key investment driver for FCT. FCT's acquisition plan is currently suspended due to difficult market conditions. At the 2Q briefing, the manager commented on the divide between the physical market and S-REIT valuations. FCT's price has increased 30% since then, and it is now trading at a yield of 7.5%.

NP2 most compelling. Among the ROFR assets, we find Northpoint 2 most compelling because of the small deal size and its synergy with an existing asset - Northpoint. The asset is close to 100% leased. A put and call option agreement with a price range of S$139.5m-S$170.5m is in place. The agreement expires in December 2009. If 100% debt funded, buying NP2 would increase FCT's gearing to about 42-45%.

But stumbling blocks, still. Note this pricing range is roughly equivalent to a 12% discount to 8% premium on Northpoint's Sept 2008 valuation. This is not a very attractive deal, in today's context. We think the market may be more receptive to a "cheaper" deal; a desire FNN may have no interest in accommodating. The deal structure itself also promises to be complex - if the buy is not 100% debt-funded, FNN may need to do its part as a 51% stakeholder. This holds even if FCT goes for potentially lower priced third-party assets. A potential solution is a cash-and-shares deal on a pipeline asset, sidestepping the need for a large EFR. But financing acquisitions may not be a top priority for FNN, especially when sibling Frasers Commercial Trust [FCOT, NR] presents a more pressing case for sponsor support. As such, we believe a buy call is yet to be justified on FCT. Our fair value estimate rises to S$0.75 (previously: S$0.62) as we relax our discount rate to reflect a lower cost of equity. Maintain HOLD on valuation grounds.

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.