FSL – DBS

DPU cut will pay off in long run

• Guides for lower DPU payout of 1.50UScts from 3Q09 onwards, down from 2Q09 DPU of 2.45UScts
• Move will accommodate amortizing loan structure to avoid breaching loan covenants
• FY10 dividend yield still a healthy 13%
• Maintain BUY on easing covenant/ refinancing concerns, target price revised up slightly to S$0.72

Move necessary to sustain business model. While 2Q09 DPU of 2.45UScts was in line with previous guidance, management sprang a surprise by reducing its DPU guidance to 1.50UScts from 3Q09 onwards – down 39% from the current level. This would translate to a payout ratio of about 50% of its quarterly cash generated, and the remaining cash (about US$8m) would be used for debt prepayment as described below.

From bullet loans to amortizing. To avoid breaching the loan-to-value covenants on its borrowings, management is in the process of working out an agreement with its lenders – whereby they prepay debts on a regular basis in exchange for the covenant waiver. In effect, this is a shift to an amortizing loan structure.

Valuation should reflect lower risks, better growth prospects. While we cut our FY09 and FY10 DPU forecasts by 20% and 38%, respectively, we look forward to a more sustainable quarterly DPU of 1.50UScts and a definitive agreement with lenders in the
near term. Moreover, once the covenant breach uncertainty is out of the way, FSLT may find it easier to tap the equity markets and acquire potentially DPUaccretive assets at cheap valuations. Thus, with the stock trading at 13% FY10 yield, we still find the risk-reward ratio favourable and maintain BUY at a TP of S$0.72.