Should You Invest in Frasers CentrePoint Trust (SGX:J69U)?
If you have noticed, most of the listed companies on Singapore Exchange belong to the industries such as property, manufacturing, construction engineering, and healthcare.
For property, we have the likes of Centurion, GuocoLand, Lian Beng, KSH Holdings, Heeton, City Development, CapitaLand, Hong Kong Land, SingHaiyi, etc. We can value them using Price-to-Book (P/B) ratio. From my experience, they are not good investments because of their inability to scale their operations. Furthermore, the valuations are heavily dependent on interest rates and economy outlook.
For manufacturing, we have Hi-P International, InnoTek, Sunningdale, Micro-Mechanics, UMS, Fu Yu, etc.
For most Asians, there is an obsession towards property or property-linked equity assets. Stocks and Real Estate Investment Trust (REIT) are considered property-linked equity.
There are hospitality, healthcare, retail, commercial and industrial type of REITs.
My preference has been retail and healthcare REITs because they provide more consistency in their results.
(RELATED: To read more about REITs and how to filter them, learn about YieldSavvy.)
Frasers CentrePoint Trust
Among my friends, the talk of the town was Frasers CentrePoint Trust‘s 33.3% acquisition of Waterway Point. It was partially financed by debt and share placements.
Let’s analyse the numbers and see whether it makes sense to buy the shares.
- Property occupancy –> 96%
- Revenue and distribution per unit still growing healthily
- Positive rental reversion of 2%
- Gearing ratio: 28.8%
- Average cost of borrowing: 2.8%
More Information
I would focus on Causeway Point and ask myself whether there are new shopping mall developments around Woodlands. If you look at their Bedok Point, it was doing relatively okay until Bedok Mall took away some of their human traffic.
Despite that, you can see the management of FCT was able to increase the mall occupancy over the quarters.
(Source: Frasers Centrepoint Trust 1H 2019 Results)
Best Performance Indicator: DPU Trend
Regardless of how many factors I analyse, I will always go back to visit the Distribution Per Unit (DPU) trend.
Whether a REIT is able to increase rental on tenant, push up occupancy rate, or whatnot, the residual effect will go to DPU trend.
Using YieldSavvy, here is the historical track record of FCT’s DPU:
It has been fairly consistent however the growth rate of the DPU has slowed down considerably.
Current Dividend Yield
According to a reliable website, REITData.com, the current yield of FCT is roughly 4.6%. I think it is too low for me. My internal target is 5.2% or above.
I like to compensate reasonably enough for putting my hard-earned money into a REIT, and you must adopt similar mindset as well!
Why? There are opportunity costs.
If I am getting a yield of 4.6% from FCT, why not invest in VICOM to get 5.2 – 5.5% yield? Or something else that gives me a better return?
Do you see what I mean?
Ok, so what about Waterway Point? Does it increase the DPU for the shareholders?
Although the acquisition will increase the income by 12%, the distribution per unit will increase by 0.63% because it is issuing more shares. Because of that, I don’t expect FCT’s dividend yield to change drastically.
Is It Overvalued?
Whether something is overvalued or undervalued, it is up to one’s judgement. I am clear that for any REITs, I like a REIT that gives me >5% or more.
Let’s say… the current yield is 4.6% and I like a yield of 5.2%.
It means for FCT’s dividend yield to increase from 4.6% to 5.2% (increase +0.6%), the share price has to come down by 13%.
What does it mean? Given my yard stick of 5.2% yield, it means FCT is overvalued by 13% — an equivalent of 2.8 years of dividend.
(RELATED: 3 Singapore / Hong Kong Dividend Stocks)
When I sell now, I am collecting 2.8 years of dividend “in advance”.
In my opinion, Frasers Centrepoint Trust is overvalued and anyone should wait for some decline in the share price before acquiring shares in the REIT.
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Should you have any sharing on FCT, leave a comment below! Thanks for reading!