Limited Retail Space Supply Will Strengthen Demand For Prime Suburban Malls

Key Takeaways

• Strategic AEIs and lease refreshes aim to boost rental income, maintain high occupancy, and enhance operational efficiency for revenue growth.
  
• Robust financial positioning with hedged debt supports earnings growth through effective cost management and operational flexibility.
  
• Slight drops in occupancy and increased gearing pose revenue risks, while market slowdowns and travel trends may impact tenant sales and footfall.

Catalysts

Frasers Centrepoint Trust ("FCT") is a leading developer-sponsored retail real estate investment trust ("REIT") and one of the largest suburban retail mall owners in Singapore with assets under management of approximately S$6.9 billion.

• The ongoing asset enhancement initiative (AEI) at Hougang Mall, targeting a 7% ROI on a $51 million CapEx, indicates potential for increased rental income and foot traffic, which could positively impact revenue and earnings.
  
• The limited new retail space supply expected from 2025 to 2027, with less than 1% overall stock coming to the market, suggests strong demand for existing prime suburban malls, leading to potential rental growth and enhanced net margins.
  
• Proactive management through continuous small-scale AEI and tenancy curation, such as the 20% to 30% refresh of expiring leases, aims to improve the retail offering and maintain high occupancy rates, directly supporting revenue growth and operational efficiency.
  
• Expected population and income growth in the catchment areas, supported by government policies like the progressive wage model, promises increased shopper spending capacity, thus boosting sales and revenue potential for the malls.
  
• Favorable financial positioning, evidenced by a hedged debt ratio of 65.5%, reduced cost of debt, and a well-managed debt maturity profile, provides a stable foundation for earnings growth through cost management and operational flexibility.

Frasers Centrepoint Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Frasers Centrepoint Trust's revenue will decrease by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 49.3% today to 60.0% in 3 years time.
• Analysts expect earnings to reach SGD 226.4 million (and earnings per share of SGD 0.12) by about March 2028, up from SGD 197.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.4x on those 2028 earnings, up from 20.2x today. This future PE is greater than the current PE for the SG Retail REITs industry at 16.4x.
• Analysts expect the number of shares outstanding to grow by 0.67% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.6%, as per the Simply Wall St company report.

Frasers Centrepoint Trust Future Earnings Per Share Growth

Risks

• A slight drop in occupancy rates, from 99.7% to 99.5%, indicates a potential risk of decreased revenue if this trend continues or worsens.
  
• The gearing level has slightly increased to 39.3%, which could increase financial risk and impact net margins and earnings, especially in an environment of rising interest rates.
  
• The overall retail sales growth is mixed, and a broader market slowdown, with the RSI showing a 1.4% dip, could negatively impact tenant sales, affecting revenue.
  
• Increased outbound travel among Singaporeans could lead to lower footfall and tenant sales during peak holiday periods, potentially impacting revenue.
  
• Temporary disruptions and occupancy drops are expected during the asset enhancement initiatives at Hougang Mall, which might temporarily reduce revenue and net margins.

Valuation

• The analysts have a consensus price target of SGD2.492 for Frasers Centrepoint Trust based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SGD2.79, and the most bearish reporting a price target of just SGD2.16.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SGD377.5 million, earnings will come to SGD226.4 million, and it would be trading on a PE ratio of 25.4x, assuming you use a discount rate of 7.6%.
• Given the current share price of SGD2.2, the analyst price target of SGD2.49 is 11.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.