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Broker's take: CGS-CIMB positive on FCT's AsiaRetail Fund, Bedok Point deals

Bedok Point - to be sold by FCT to Frasers Property - ST file.jpg
CGS-CIMB said Bedok Point has been one of FCT's weaker assets, given its relatively low occupancy and weaker rental reversions.

TO account for Frasers Centrepoint Trust's (FCT) proposed AsiaRetail Fund (ARF) stake purchase as well as its potential sale of Bedok Point, CGS-CIMB has upped its target price on the counter to S$2.83, from S$2.78 previously.

The research team, which said on Friday that it views both deals positively, also reiterated its "add" call on FCT.

Stapled securities of FCT were trading at S$2.59 as at 1.41pm, up S$0.05 or 2 per cent.

The real estate investment trust (Reit) is planning to buy the remaining 63.1 per cent stake in ARF for about S$1.06 billion from its sponsor, Frasers Property. The acquisition price indicates a net property income (NPI) yield of 5 per cent.

This deal will further raise FCT's profile as a suburban retail Reit, said CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee.

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Upon completion of the transactions, FCT's portfolio's net lettable area (NLA) will expand by 64 per cent to 2.3 million square feet, placing FCT among the largest suburban mall owners in Singapore. FCT's portfolio size will also double to about S$6.65 billion.

ARF owns five malls in Singapore - Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1 - as well as the Central Plaza office property.

CGS-CIMB likes ARF's malls as they are "strategically located" within a five-minute walk to an MRT station.

Moreover, of the five assets, four are situated in low retail space per capita regions, while three are also dominant malls and hence face little competition in their respective areas, CGS-CIMB said.

Separately, FCT is looking to sell Bedok Point to Frasers Property for S$108 million. The sale price indicates an NPI yield of 2.5 per cent.

Ms Eing and Ms Lock wrote that Bedok Point has been one of the Reit's weaker assets, given its relatively low occupancy and weaker rental reversions.

In H1 FY20, the mall accounted for just 3.4 per cent of FCT's total revenue, they added.

CGS-CIMB expects the Reit to see a faster recovery from the impact of the coronavirus outbreak compared with its peers, given that the pandemic has heightened the importance of having a resilient portfolio, which would further boost FCT's profile as the only pure suburban mall Reit in Singapore.

Meanwhile, Citi on Friday maintained its "neutral" rating on FCT.

The ARF stake purchase will enable the Reit to fully own a "resilient" suburban retail portfolio, with a "decent" 4.7 per cent accretion to distribution per unit (DPU) for the nine months ended June 30, 2020, noted Citi analyst Brandon Lee.

However, he said that while the tenant sales recovery to 97-99 per cent of pre-Covid levels was "impressive", it might partly reflect pent-up demand, with shopper traffic (at 60-70 per cent of pre-Covid levels) affected by safe-distancing rules.

The 4.7 per cent DPU accretion from the proposed acquisition is in line with Citi's 5 per cent estimate. However, there could be higher accretion resulting from the potential tax transparency on Century Square and the "conservative" illustrative issue price of S$2.22 per unit (versus FCT's last closing price of S$2.54 on Thursday), Mr Lee wrote. FCT intends to fund the acquisition by issuing up to 628 million new units via private placement and/or preferential offering at the illustrative issue price to raise up to S$1.39 billion.

The ARF acquisition price is based on the latest property valuation of S$3.07 billion, which is at a 0.03 discount to the Aug 1, 2020 valuation but at a 5.4 per cent premium to the Sept 30, 2019 valuation.

Citi said it was "surprised" by the higher valuation compared to last September, in view of the onset of the coronavirus pandemic, FCT's peer CapitaLand Mall Trust's H1 2020 asset devaluation of 2.5 per cent, and structural headwinds.

"With gearing now at 39.3 per cent, any potential asset devaluation could bring it beyond investors' preferred 40 per cent mark," added Mr Lee. The Reit has said its gearing ratio would increase by 4.3 percentage points to 39.3 per cent after the transactions on a pro forma basis.

In addition, Citi wrote that ARF's portfolio has a short weighted average lease expiry by NLA of 1.5 years, hence there could be downside risk to reversions for upcoming expiries, given the uncertain macro climate.

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