FCT cements position as heartland mall king with Nex acquisition: Analysts

Analysts say the joint acquisition of Nex makes Frasers Centrepoint Trust the “largest suburban retail landlord” in Singapore. PHOTO: MERCATUS CO-OPERATIVE

SINGAPORE – Analysts are generally positive about the prospects for Frasers Centrepoint Trust (FCT), after news of the trust jointly acquiring with sponsor Frasers Property a 50 per cent stake in suburban mall Nex for $652.5 million.

Following the announcement on Thursday, analysts from DBS Group Research and Citi Investment Research noted that this makes FCT the “largest suburban retail landlord” in Singapore while diversifying its portfolio.

FCT is “fortressing the suburban king title” with the potential to grow further post-acquisition, said DBS in a report on Friday, adding that this is an “accretive and sizeable acquisition to start 2023 with a bang”.

“The growing population and strong pipeline of Housing Board flats being built within the Bidadari estate located nearby the mall, when completed in the medium term, augur well for the longer-term performance of the mall given a growing population catchment,” the research team said.

The stake in Nex was bought from a subsidiary of NTUC unit Mercatus Co-operative, which had put it on the auction block in June 2022.

Located in Serangoon Central, the mall is integrated with Serangoon Bus Interchange and Serangoon MRT station, and is one of the largest suburban retail malls in Singapore. The property’s committed occupancy as at Nov 30 was 99.9 per cent.

FCT reported that shopper traffic and tenant sales for the first quarter of financial year 2023 continued to grow. Shopper traffic grew 38.3 per cent year on year, while tenant sales grew 13.4 per cent year on year for the quarter.

The trust can further consider boosting Nex’s performance through a combination of tenant remixing and asset enhancement initiatives in the medium term, DBS said. The research firm maintains a “buy” call for the trust and a target price of $2.60.

DBS and Citi also highlighted FCT’s ability to generate about 0.5 per cent distribution per unit (DPU) accretion without stretching the balance sheet. In particular, DBS projects FCT’s gearing to reach an “optimal level” of around 38.5 per cent post-deal.

Still, Citi analyst Brandon Lee remains neutral about the transaction given mild DPU-accretion and future acquisitions being limited due to higher gearing. He expects the “benign” 0.5 per cent DPU accretion to remain for the financial year, and post-acquisition gearing to be higher at 39.2 per cent compared with 33.9 per cent in the first quarter of financial year 2023.

“The DPU accretion could be thinned out if debt cost is not fully hedged, though this could be mitigated by annual rental escalations (if any) and/or positive rent reversion,” he added. Citi has an unchanged “neutral” call on FCT with the target price at $2.13.

While the trust’s net property income is also projected by Citi to be in the high 4 per cent, Mr Lee added that the 6 per cent year-on-year increase in Nex’s valuation, compared with the 1 per cent for most suburban malls, surprised the team.

“FCT’s acquisition of Nex was a pleasant surprise to us, as we thought any potential sale would likely occur in the medium to long term,” he said

Meanwhile, DBS’ research team projects further rental upside in the coming years, with room for reversionary rents to rise.

Units of FCT closed four cents or 1.8 per cent higher at $2.24 on Friday. THE BUSINESS TIMES

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