Brokers’ take: Maybank upgrades FCT to ‘buy’ on attractive valuation, resilient retail sales

MAYBANK Securities has upgraded Frasers Centrepoint Trust (FCT) to “buy” from “hold”, noting the real estate investment trust’s (Reit) attractive valuation and resilient retail sales.

In a report released on Tuesday (Jul 4), the research team also highlighted the Reit’s quality portfolio and the potential rotation of investors’ focus on suburban malls as reasons for its upgrade. 

Maybank noted that FCT’s unit price has fallen 5 per cent since its downgrade on Apr 27, 2023. It is currently trading at 0.93 times its price-to-book ratio, with a yield of around 5.6 per cent. 

“We think this is attractive, given the high-quality portfolio of retail malls located next to transport nodes and dense population catchments,” said analyst Krishna Guha.

The upgrade also took into consideration a 13 per cent return on the Reit’s unit price, its H1 financial performance and assumes a lower borrowing cost for FY2024, Guha noted. 

Maybank has maintained its target price of S$2.35 on FCT, based on a dividend discount-model which factors in a risk-free rate of 6.6 per cent and a medium-term growth rate of 2 per cent. 

FCT units were trading at S$2.18 as at 1.55 pm on Tuesday, up 0.5 per cent or S$0.01. 

Maybank has also lowered its estimates for FY2023 distribution per unit (DPU) by 0.8 per cent, but raised its DPU estimates for FY2024 by 0.2 per cent. 

The lower revenue, which is based on the Reit’s H1 performance, takes into account the more subdued growth in spot rents of 4 per cent, versus the previous 5 per cent for FY2023 and FY2024. However, impact from spot rents will be offset in FY2024 due to lower borrowing costs. 

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With the current low unemployment rate and “necessary shopping”, Guha also expects a stable operating metrics and distribution profile for the Reit.

FCT has benefited from the healthy retail sales, with monthly tenant sales being 14 per cent higher than the pre-Covid level in H1 2023. Maybank expects this segment to remain resilient, given the low unemployment rate, tight domestic labour market and supportive government policies.

The Reit’s acquisition of a half stake in Nex mall, together with its sponsor, has also placed FCT as the largest suburban retail mall owner in Singapore. 

Guha noted that this gives the Reit economies of scale, lower servicing costs and enhanced bargaining powers with larger retailers. 

In January 2023, FCT teamed up with Frasers Property to buy a 50 per cent stake in Nex for S$652.5 million. The move came months after FCT raised its stake in Waterway Point to 50 per cent from 40 per cent in September 2022. 

Maybank expects these acquisitions to “boost distributions especially as they come in an environment of a rebounding retail sector”.

With the recovery in tourism likely to be protracted, Maybank also anticipates investors may “favour domestic focused names like FCT, especially after hospitality Reits outperformed in Q2”.