, Singapore

Here's why the worst could be over for Frasers Centrepoint

The company is projected to deliver consistent returns.

According to a report from DBS, Frasers Centrepoint Limited (FCL) and and its four listed REITs – Frasers Centrepoint Trust (FCT), Frasers Commercial Trust (FCOT), Frasers Logistics & Industrial Trust (FLT) and Frasers Hospitality Trust (FHT), are all expected to deliver consistent returns in the coming years, leveraging on the improved outlook of their key markets of Australia and Singapore.

Supported by a solid balance sheet, FCL remains on the outlook for further acquisition opportunities to deepen their exposures and to grow recurring income base. Restocking its land bank in Singapore is also a priority as most of its projects are substantially sold.

For the REITs, DBS sees bright spots in the Australian logistics and tourism sectors where FLT and FHT operate in. Given limited incoming supply in the next few years, DBS projects that they will be able to deliver higher returns as demand for logistics space and hotels remains firm. FCT is expected to recover from difficulties, and FCOT is expected to have limited downside regarding the renewal of its HP lease.

Here’s more from DBS:

The worst is over for FCT as the refurbishment for Northpoint enters its final phase and will complete by September 2017. Thereafter, we project FCT to deliver a 3% CAGR growth in distributions over FY17F-19F.

Whilst uncertainties surround FCOT regarding the renewal of HP lease (18% of revenues) in the coming months, we believe negatives are priced in at 7.5% yield, which is a 150-bp spread against its larger office REITs (vs 100-bp 5-year average). There are levers that the manager can undertake to maintain DPUs and as such, we see limited downside.

Asset recycling activities could turn up. Asset recycling has been a consistent strategy that FCL employs to maintain high ROEs and deploy proceeds to development projects with higher returns. We see an attractive pipeline of properties that could be tapped across the group’s staple of listed REITs. Given where a majority of its REITs are trading, we see acquisition opportunities for both FCT and FLT in the immediate-medium term given stabilised assets on the sponsor’s balance sheet.

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