Frasers Centrepoint Trust downgraded by Daiwa after below-view results

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Daiwa downgraded Frasers Centrepoint Trust to Hold from Outperform, saying it was turning more cautious on rental reversions and after the distribution per unit (DPU) missed its forecasts.

“The DPU was 12 percent lower than our forecast due to slightly weaker-than-expected rental income nearly across the board,” Daiwa said in a note on Thursday.

“Operating expenses were also higher than expected for most malls, particularly Causeway Point, as management clarified (in the results briefing) that the increases were for maintenance (“catching-up in repairs”), professional fees and utilities, and included one-off charges,” Daiwa added.

Frasers Centrepoint Trust’s manager said on Wednesday that its fiscal fourth quarter net property income fell 4.9 percent on-year to S$32.88 million on higher property expenses, which were up 14.4 percent on-year to S$15.63 million.

The DPU fell 3.6 percent on-year to 2.862 Singapore cents from 2.97 Singapore cents in the year-ago quarter, FCT’s manager said.

Daiwa noted that rental reversion momentum slowed to 0.2 percent in the fiscal fourth quarter. While management seemed confident of obtaining positive rental reversions in the coming year, it also said it would be dependent on the leases up for renewal and that it might take a longer-term view and accept lower rentals for stronger tenants which pull in crowds, Daiwa noted.

After the fourth-quarter results, Daiwa cut its fiscal 2019 and 2020 DPU forecasts by 4-5 percent, lowering its target price to S$2.28 from S$2.44.

“We choose to be more conservative now given the greater overall economic uncertainty and a more subdued residential property market post cooling measures,” Daiwa said. “These sentiment factors could adversely affect tenant sales while suburban-retail supply in the coming year (Paya Lebar Quarter and Jewel @ Changi) could further dilute consumer spending and island-wide retail sales per square foot.”

In addtion, Daiwa said Frasers Centrepoint Trust appears less attractive than CapitaLand Mall Trust, which it rates at Outperform, on DPU growth as CMT’s Funan redevelopment was set to drive distribution growth from next year. It added that the valuations and yields of the two REITs were similar.

Units of Frasers Centrepoint Trust ended Thursday down 0.45 percent at S$2.22.

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