FCT – DBS

Steady Yield

At a glance

• Results in line. DPU rose 6.3% yoy due to organic rental growth and higher distribution income payout of 95%

• Higher rental renewals supported by increased shopper traffic and high average portfolio occupancy of 93.4%

• Northpoint AEI on track with high lease pre-commitments and a 20% expansion in average rental rates. This will underpin forward earnings growth

• Maintain BUY, TP $0.81

Comment on Results

Results in line with street estimates. Gross revenue remained stable at S$21.1m (-2% yoy, +8% qoq) on higher portfolio occupancy of 93.4% and positive rental reversions, averaging +7.3% over pcp. NPI grew 2% yoy (+15% qoq) to S$14.7m, lifted by better expense ratio of 30%. Distribution income increased 7.3% yoy to $11.6m (DPU: 1.86cts), thanks to improved operating performance and a higher dividend payout of 95% (vs 90% in 2Q08). As at 2Q09, gearing remains healthy at 30% and interest cover at 4.6x.

Positive DPU Cagr over FY09/11. Despite challenging conditions, DPU is expected to grow by a 4% Cagr over the next 3 years. To date, FCT has locked in 96% of its FY08 gross rental income and has a small 2.5% and 12% of NLA to be renewed in FY09-FY10. Full impact of higher income from Northpoint AEI will be felt from FY10. The makeover, completing mid 09, has enabled the group to tie in 20% higher rentals and boost property NPI by 30%.

Recommendation

Maintain BUY, TP $0.81. We like FCT for its exposure to the suburban retail sector. Earnings resilience derived from a welllocated portfolio catering largely to necessity shopping. In addition, successful enhancement initiatives at Northpoint would lead to a positive 4% DPU Cagr over the next 3 years while healthy balance sheet and little near term refinancing need would mitigate any need for a dilutive fund raising exercise. At current price, FCT offers a potential total return of 25%. Maintain Buy.