Analysts bullish on FCT as it ups stake in PGIM Real Estate AsiaRetail Fund

Singapore

ANALYSTS are optimistic on Frasers Centrepoint Trust (FCT), believing that the suburban retail Reit's acquisition of an additional 12.07 per cent in PGIM Real Estate AsiaRetail Fund (ARF) will bring it closer to acquiring the assets held under the fund.

These include Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1 in Singapore, as well as Setapak Central in in Kuala Lumpur, Malaysia.

The acquisition will increase FCT's interest in ARF from 24.82 per cent to 36.89 per cent. This, together with the holdings of its parent Frasers Property (FPL) of 63.1 per cent, raises the group's shareholding in ARF to 100 per cent.

In a report, Tata Goeyardi, managing director, co-head of equities at SooChow CSSD Capital Markets, said: "Management is currently open to both options of acquiring the remaining stake from FPL and/or progressive asset purchase, which is more palatable in terms of funding."

The latest acquisition will be fully funded by debt and is expected to raise FCT's pro forma gearing from 32.9 per cent to 36.2 per cent.

Citi analyst Brandon Lee expects FCT to hit a higher gearing of 37.9 per cent, after including ARF's underlying debt. This implies just S$200 million of debt headroom before it will hit 40 per cent.

Although the government has recently allowed Singapore Reits to gear up to 50 per cent, most are still choosing to play it prudent.

Mr Lee said: "While distribution per unit (DPU) accretion of this transaction is benign at 0.1 per cent, we see FCT's ultimate goal in acquiring its sponsor's remaining 63.1 per cent stake, which will result in tax transparency, interest cost savings and removal of an additional layer of management fees. This could lead to a more than 5 per cent DPU accretion, on our estimates.

"However, given that the 63.1 per cent stake will cost at least S$1 billion, on our estimates, and FCT's gearing of about 38 per cent implies only S$0.2 billion of debt headroom before hitting 40 per cent, we think that any potential acquisition will require a mix of equity, debt and asset sales.

"Given the potential for further rental rebates in the second half of 2020, our cautious view on the retail sector and total shareholder return of less than 1 per cent, we maintain our 'neutral' rating." He has a target price of S$2.23 on the stock.

CGS-CIMB analyst Eing Kar Mei said these malls fit well into FCT's positioning as a pure suburban mall landlord.

"Quality malls are hard to come by in Singapore at reasonable prices and we see the potential acquisition of the assets under ARF as a good opportunity for FCT to widen its footprint in the suburban space and further underpin its income stability. ARF's assets attract strong traffic of 86 person per square foot (psf) versus listed malls' 84 person psf on average."

She maintained her "add" rating on FCT at an unchanged target price of S$2.49, believing that its suburban mall portfolio will see the fastest recovery from Covid-19 as it is less reliant on tourist shoppers, and its unit price will be supported by the potential acquisitions of ARF's assets.

Meanwhile, Mr Goeyardi, positive on FCT's inorganic growth and incremental step towards acquiring the rest of the malls under PGIM Real Estate ARF in future, has a "buy" rating on the stock with a target price of S$2.58.

PGIM Real Estate ARF is managed by PGIM Real Estate, the real estate investment business of PGIM Inc, the US$1 trillion global investment management business of Prudential Financial listed in New York. The fund is also the largest non-listed retail mall fund in Singapore. Aside from retail malls, ARF also owns an office property, Central Plaza in Tiong Bahru, Singapore.

Previously, FCT had acquired stakes of 17.13 and 1.67 per cent in ARF in April 2019 slightly above net asset value. Capital redemption in June and September last year boosted its effective stake to 24.82 per cent.

Units of FCT closed one cent or 0.43 per cent higher at S$2.32.