FCOT – DBS

Equity Raising Possible

FCOT results were in line with our expectations. FY08 DPU of 6.35 cts translates to a 25% DPU yield at current trading price, one of the highest in the sector. We believe current price reflects investor nervousness of near term refinancing requirements and possibility of an equity raising exercise. Until more clarity on that front, share price is unlikely to re-rate. Based on our estimates, FCOT is trading at c.17% FY09-10 yield. Maintain HOLD, TP S$0.23.

Results in line. 4Q08 distributable income was -40% yoy at S$9.3m due to increased interest expense from higher debt margins incurred in 2H08 on top of increased property expenses. FY08 distributable income came in at S$45.8m (- 3.5% yoy), pulled up by a better 1H08 performance, translating to a DPU of 6.35cts for the full year. Book NAV of S$0.97 per share as at Dec’08 reflects (i) further devaluations to Keypoint (-7%) and Cosmo Plaza (-10%) and (ii) translation losses due to a declining A$ offset by a stronger yen. As a result, gearing spikes up to 54.4%.

Adjusting FY09 DPU estimates. We lower our forward DPU estimates by 12% to reflect (i) lower than expected A$-S$ exchanged rates for FY09 (ii) tenant default at Cosmo Plaza as the main master lessee, Restoration Asset KK (60% of asset NLA) is in rental default and is not expected to contribute to earnings further. The manager has begun marketing the space and is in progress of releasing c.30% of the vacated space.

Recapitalization a likely catalyst. Given a gearing of 54.4%, FCOT is dangerously near the regulatory limit of 60%. We view that a re-rating for the stock will hinge on further details of a potential recapitalization exercise aimed at strengthening the trust’s fundamentals and resolving its ST financing needs.