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Broker's take: Citi Research upgrades Frasers Centrepoint Trust to 'buy'

CITI Research has upgraded Frasers Centrepoint Trust (FCT) to "buy", increasing its price target for the retail reit (real estate investment trust) by 23.6 per cent to S$3.00.

As at 2.35pm, FCT was unchanged at S$2.72 on 775,300 units traded. Based on Citi's target price, this amounts to a total return of 15.5 per cent.

Citi Research analysts Brandon Lee and Goh Si Xian revised their call on FCT, citing potential cost savings from the consolidation of its stake in PGIM Real Estate Asia Retail Fund (PGIM), net asset value (NAV) accretive portfolio reconstitution plans as well as strong forecast distribution per unit (DPU) growth for FY2020 and 2021 of 7 per cent and 3 per cent, respectively.

"We also like its pure domestic and suburban retail exposure, which shield it from currency fluctuations and macroeconomic slowdown," they added.

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At present, FCT has a 24.8 per cent stake in PGIM while its sponsor - Frasers Property Limited - owns a 63.1 per cent stake. The remaining stake is held by two other shareholders.

If FCT and Frasers Property own a combined 100 per cent stake in PGIM, the Citi analysts said shareholders can benefit from two potential cost savings.

Firstly, there could be a corporate tax removal, which would boost PGIM’s dividends by 15 per cent and FCT’s DPU by around 2 per cent.

Secondly, there might be a lower debt cost. This "would boost PGIM’s dividends by 30 per cent and FCT’s DPU by about 3 per cent", the analysts said.

With regard to portfolio reconstruction, the Citi analysts noted that two malls in Malaysia and three in Singapore - YewTee Point, Bedok Point and Anchorpoint - could be shortlisted for divestment, with proceeds to be redeployed to cover the cost of Fraser Property's purchase of its PGIM stake and in Northpoint City South Wing.

On Oct 24, FCT posted a DPU of 2.913 Singapore cents for the fourth quarter ended Sept 30, boosted by higher portfolio occupancy and contributions.

Q4 gross revenue was down 0.5 per cent to S$48.3 million, while net property income edged down 0.1 per cent to S$32.85 million for the quarter.