FCT fair value hit

Strong unit price performance
Frasers Centrepoint Trust (FCT) has enjoyed a good run-up in its unit price, clocking a 7.0% return YTD and 40.8% return YoY. This compares significantly to the 5.7% YTD and 31.4% YoY increase seen by the FTSE ST REIT Index (STI: 4.8% YTD, 10.2% YoY). We believe the outperformance is reflective of its resilient suburban malls and laudable financial results in 1QFY13. As a note, its DPU grew by 9.1% YoY to reach 2.40 S cents despite retaining S$2.1m in distributable income during the quarter.

Likely limited upside in near term
At current price level, we believe that most of the good news has been priced in. Now trading near its historical high and our fair value, FCT is the most expensive (P/B of 1.40x) when compared to its local retail peers (1.18x) and the S-REITs sector average (1.17x). While we note that FCT’s portfolio occupancy (96.4% as at 31 Dec 2012) is likely to improve further in 2QFY13 following the completion of fitting out and start of operations by tenants at Causeway Point and Bedok Point, we judge that the incremental income is likely to be relatively modest from the prior quarter.

Downgrade to HOLD on valuation grounds
The asset injection of Changi City Point into FCT’s portfolio may possibly be a catalyst to its unit price and DPU growth, but timeline is uncertain as the regulatory procedures for the strata division into its retail, business park and hospitality components is a lengthy process. At an estimated book value of ~S$198m for the retail mall, we also do not rule out the possibility of FCT raising equity to fund the acquisition. Recall that FCT has previously financed its past acquisitions via private placements in 2010-11. Our fair value remains unchanged at S$2.13. However, in view of the limited upside potential in the near term, we now downgrade FCT from Buy to HOLD on valuation grounds. We recommend switching FCT to CapitaMall Trust [BUY, S$2.32 FV] as a cheaper alternative to blue-chip local retail play with exposure to equally resilient suburban portfolio assets.