FrasersCT – OCBC

Downgrade on valuation

2Q was better than 1Q07. Frasers Centrepoint Trust (FCT) reported 2Q07 revenue of S$19.6m (+1.9% QoQ) and distributable income of S$10.3m (+8.7% QoQ). Distributable income per unit (DPU) came in at 1.67 cents (1Q07: 1.54 cents). The better results were due to higher turnover rent (as a result of the Chinese New Year period), better reversion in rental rates, higher casual leasing and lower costs. FCT also benefited from S$0.198m from its sponsor as a result of the revamping of Anchorpoint.

Tweaking forecast. With tighter cost control and better operating matrix, we are adjusting our FY07F DPU from 5.95 cents to 6.31 cents, but maintaining FY08F DPU of 7.57 cents. Growth will come from its acquisition pipelines; namely Centrepoint, Northpoint 2, Yew Tee Point and Bedok Mall. The latter will be redeveloped by FCT’s sponsor, Fraser Centrepoint Ltd (FCL). In terms of timeline, Northpoint 2 and Yew Tee are likely to be acquired by late 2008 with the Bedok site probably in 2010. We do not expect any funding issue as FCT has recently obtained a credit rating, meaning that its current gearing of about 27% can be raised to 60%. This translates to a war chest of over S$300m.

Asset enhancement starts in 2Q07. FCT has scheduled Anchorpoint Shopping Centre (ASC) for reconfiguration in May 2007. It intends to reposition ASC as a food mall and work is expected to be completed in 6 months. Beyond ASC, asset enhancement works (AEW) are likely to be carried out at Northpoint and Causeway Point. These latter projects are likely to have greater impact on FCT’s earnings due to its significantly larger size. However, we do not expect the completion of AEW at Causeway Point until 2008.

Downgrade to HOLD. FCT has done very well, rising over 65% above its IPO price and surpassing our fair value of S$1.59. The current price means that dilution from new units will be less. This in turn has a positive impact on our valuation. We thus raised our fair value estimate to S$1.67. At current trading range, FCT’s P/B is high at about 1.6x and trading yield is low at only about 3.7%. While we continue to like FCT for its exposure to the retail sector, strong asset enhancement possibilities and clarity in acquisitions, at current valuation, FCT no longer looks compelling. We thus downgrade our rating on FCT from BUY to HOLD.