Broker's take: KGI resumes coverage on FCT with 'outperform' call

KGI Securities has resumed its coverage on Frasers Centrepoint Trust (FCT) with an "outperform" call and a target price of S$2.39, from a previous target price of S$2.51.

FCT units were trading at S$2.06 as at 11.50am on Monday, down S$0.02 or 1 per cent.

The retail real estate investment trust's suburban malls with a natural catchment of foot traffic should recover faster than its peers, wrote KGI analyst Joel Ng in a research note on Monday.

This comes amid challenges faced by retail Reits in 2020 due to virus-related restrictions and safe-distancing rules.

"As we see a shift in short-term spending, households will likely increase spending on daily necessities and reduce discretionary spending on luxury and durable goods," Mr Ng said.

Food and beverage (F&B) outlets near residential areas which are open for takeaway or delivery may also outperform higher-end restaurants which are located mainly in business districts.

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FCT's top 10 tenants which account for 22 per cent of gross rental income in the second quarter of 2020 cater mainly to groceries, F&B or small discretionary shopping.

Moreover, there are still growth opportunities for FCT following the impact of Covid-19. With its "conservative" gearing ratio of 33 per cent, the Reit has significant debt headroom to either grow through acquisitions or fund asset enhancement initiatives. This is especially after the Monetary Authority of Singapore said it would raise the regulatory gearing limit to 50 per cent from 45 per cent.

FCT's biggest asset Causeway Point - which accounts for 46 per cent of net lettable area - may also benefit from the Singapore government's plans to develop the Woodlands Regional Centre.

The Reit may also potentially divest its smaller and underperforming malls such as Anchorpoint, which would allow it to free up capital.

KGI is expecting its forecast for FCT's FY2020 distribution per unit to fall 17 per cent year on year to 10 Singapore cents. This is followed by a 15 per cent rise year on year to 11.6 cents in its forecast for FY2021, and full recovery to above 12 cents in its forecast for FY2022.

Mr Ng added that FCT's current unit price has already factored in weakness in the second half of 2020. Hence, KGI is expecting downside risks to be minimal.