FCT – DBS

Paving the way for the next quantum leap

• Resilient suburban portfolio
• Two pronged re-rating catalyst from improving size and liquidity to drive growth
• Potential for upside earnings surprise
• Reiterate Buy with TP of $1.25

Resilient portfolio to withstand economic downturn. FCT’s well-positioned portfolio of suburban retail assets, within huge population catchment areas, offers investors DPU and portfolio value resilience in the current moderated economic environment. Rents are still reverting positively with occupancy remaining close to full.

Twin growth drivers. FCT holds significant potential for organic and inorganic growth. Within its current portfolio, enhancement works at Northpoint I has resulted in a 20% hike in average rents, which should impact earnings positively from FY10. New contribution potential from unlocking value at Causeway Point, which should be significant, has not been included into our existing forecast, thus raising the possibility of further earnings upside surprise in the longer run. Planned injection of its pipeline assets; namely Northpoint II and YewTee Point, are expected to expand asset base significantly, in view of the low base effect, while the current lower cost of capital would mean accretive additions even through using equity as currency.

BUY for sustained yields, TP S$1.25. The investment case for FCT lies in its portfolio resilience, good long-term earnings, valuation growth potential and potential rerating from expanding its asset size and improving liquidity and free float. Our target price of $1.25 based on an adjusted WACC of 6.5% and beta of 0.7x offers potential 17% absolute return over the next 12 months.