Is Frasers Centrepoint Trust (SGX: J69U) Worth a Second Look Now?
On Sunday, I was out with my family at Northpoint City, and I noticed that the mall was buzzing with excitement like COVID-19 never happened.
Here’s what I found during my latest research.
Gradual Recovery in Retail
Singapore’s retail industry seems to be on the mend.
The retail sales index, which measures the short-term performance of the retail industry based on sales records, decreased by 8.5% year-on-year in July 2020 (the latest available data).
However, this was an improvement from the 27.7% year-on-year plunge seen in June 2020.
On a month-on-month basis, seasonally adjusted retail sales bounced up by 27.4% in July 2020, mainly due to a lower base in June 2020 when most physical stores were shuttered until 18 June.
(Note: The seasonally adjusted figure removes any variation that occurs during a fixed period each year and is a better reflection of the underlying trend of monthly sales.)
It certainly looks like since Phase 2 started on 19 June 2020, retail sales have picked up.
The latest update from Frasers Centrepoint Trust also confirms this trend.
The REIT’s portfolio tenants’ sales in July 2020 was “just” 3% lower year-on-year, an improvement from the previous month’s decline of around 31%. In August, the figure further improved.
Even though the recovery has not been back to the pre-COVID levels, things are still looking good.
Room for Further Growth
On 28 September 2020, Frasers Centrepoint Trust unitholders approved the acquisition of the remaining 63.1% stake in AsiaRetail Fund Limited (ARF) from its sponsor, Frasers Property Limited (SGX: TQ5).
With that, the REIT owns 100% of ARF, which has five suburban malls — Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square, and Tampines 1 — and one office property, Central Plaza, in its portfolio.
(ARF will also divest a non-Singapore retail mall Setapak Central so that its portfolio only contains local assets.)
The acquisition of the ARF properties brings about many benefits for Frasers Centrepoint Trust. Here are some of them:
- Increase in total assets by 68%, from around S$4.0 billion as of March 2020 to S$6.7 billion, making it the second-largest suburban mall owner in Singapore
- Diversification of portfolio with no single asset representing more than 22% of Frasers Centrepoint Trust’s portfolio (in terms of asset valuation), compared to around 30% before the transaction
- Unlocking value through the concurrent sale of Bedok Point, which has a lower property yield of 2.5% as compared to ARF retail portfolio’s yield of 5%
The acquisition, together with the sale of Bedok Point and a proposed equity fundraising, is expected to improve distribution per unit (DPU) by up to 8.6% (assuming the transactions took place on 30 September 2019).
Post-transactions, Frasers Centrepoint Trust’s gearing ratio would increase to around 39% but is still a safe distance away from the regulatory limit of 50%.
Is Frasers Centrepoint Trust Undervalued?
Frasers Centrepoint Trust units closed at S$2.52 on Friday.
At that price, the REIT has a projected price-to-book ratio of 1.14 (using the net asset value of 2.22 cents) and a distribution yield of 5.2% (using DPU of 13.02 cents).
The projected valuations assume the transactions took place on 30 September 2019, as shown below:Source: Frasers Centrepoint Trust investor presentation
Frasers Centrepoint Trust’s forecast distribution yield of 5.2% looks tasty for yield-hungry investors. But we should also realise that it doesn’t include the adverse financial effects of COVID-19.
Assuming a conservative haircut of 50% since the REIT’s second-quarter FY2020 DPU fell by around that percentage, the yield falls to 2.6%. During the quarter, the REIT retained 50% of its distributable income to “preserve financial flexibility in current time of uncertainty”.
Over the longer term, on top growth from the ARF acquisition, Frasers Centrepoint Trust still has future opportunities to tap on, such as the acquisition of Northpoint City South Wing and other third-party assets.
Weighing all the above, together with the REIT’s historical track record, Frasers Centrepoint Trust could be something that REIT investors might want to re-consider, provided they are satisfied with the “lowered” yield for some time to come before full retail recovery kicks in.
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.