FCT – DMG

Strong earnings; BUY on defensive strengths

Maintain BUY for its defensive strengths. FCT reported 4QFY09 results DPU of 2.04¢ (-0.5% YoY) and 7.51¢ for FY09, 6% above our estimate. Net property income rose 24.9% due to Northpoint’s enhancement initiative and cost management measures. The better-than-expected earnings were largely due to the strong rental reversion from Northpoint following its AEI. FCT will trade ex-4QFY09 distribution on 29 October 2009. We raise our FY10 DPU estimate by 7.6% to 8.26¢, providing an implied yield of 6.6%. Maintain BUY, DDM-based TP of S$1.53.

3.5% capital value gains. FCT reported a 3.5% YoY gain in capital values to S$1.1b despite the 50bp increase in cap rate to 5.75-5.90%. This was largely due to the strong increase in its net property income. Management alluded that cap rates are unlikely to rise further under the current economic environment. We project NPI from the existing assets to rise by 7% in FY10, bringing about a corresponding increase in capital values, and a fall in gearing. We expect FCT’s gearing to hover below 30% in FY10.

Acquisition in the works? With its strong balance sheet, FCT has substantial debt headroom to acquire new assets. We expect Northpoint 2 and YewTee Point to be acquired within the next 12 months. We value both assets at ~S$300m, with NPI yields between 5.7-6.1%, above its WACC cost of 5.2%. With the acquisitions, FCT’s AUM will grow by 28% to S$1.4b by end-2010. Our valuation assumes the acquisition of these assets by mid-FY10.

Expanded AUM may address liquidity and compress yields further. With a low cost of equity, we expect the above acquisitions to be accretive, strengthening FCT’s retail oligopoly status in the northern region of Singapore. With an expanded AUM and equity base, concerns over FCT’s poor stock liquidity will be addressed. We expect a further re-rating on the stock as yields could compress closer to its 5% heyday levels seen in 2006-08. At our TP, FCT trades at 5.4% FY10 yield, a reasonable peg, in our view. Note that FCT traded at 4.6% during heydays of 2006 and 2007, suggesting that the stock has further legs to ride up the economic recovery.