FCT – OCBC

Acquisitions approved at EGM

Results in line. Frasers Centrepoint Trust (FCT) reported S$23.3m in 1Q10 revenue, up 19.6% YoY and down 6.2% QoQ. The strong YoY growth was due in large part to the income boost from the completion of asset enhancement works at Northpoint (NP). Meanwhile, we attribute the QoQ weakness to the FRS39 accounting adjustment at 4Q earnings – this is a typical 4Q blip for FCT. FCT will distribute 1.91 S cents for the quarter, up 14.4% YoY. On a QoQ basis, the payout represents a 6.4% decline but this is primarily due to retained cash from previous quarters boosting distributions in 4Q09. Excluding retained cash, the decline is 2% QoQ.

Portfolio performing well. The portfolio continues to perform well especially as occupancy picks up at NP. The retail mall is occupied at 95% as of Dec 09 versus 90% three months ago and 52% a year ago. The manager said that committed occupancy at NP stands at 99% as of end-Dec 09. The overall portfolio enjoyed occupancy of 98.6%. Leases renewed / replaced this quarter enjoyed a 3.9% increase over preceding rents.

Acquisitions approved at EGM. Unitholders yesterday approved the acquisition of two retail malls from FCT’s sponsor Fraser & Neave [FNN, NOT RATED]. FCT will pay S$164.6m for Northpoint 2 (NP2) and S$125.7m for YewTee Point (YP), at 5.78% and 5.87% net property income yields respectively, based on FCT’s forecast of forward income. The manager expects the completion of the acquisitions to be no later than July 2010. FCT will raise equity of up to 152m units (24.3% of existing units) to partially fund the purchase. The exact structure, issue price and timing of the equity fund raising (EFR) will be determined later based on “market conditions”. We assume the acquisitions are purchased on a 45-55 debtequity basis with equity raised at S$1.30.

Valuation. The manager said 95% of gross rental income is locked in for FY10. We have raised our retail rent growth rates from 0% to +5% per annum for FY10 and FY11. This is line with the revisions to our CapitaMall Trust [HOLD, FV: S$1.83] earnings estimates. At the same time, we have made some upwards adjustments to our cost of debt estimate, which brings our assumed WACC higher. Our fair value estimate slips slightly from S$1.49 to S$1.47. FCT is currently trading at 1.15x NAV and a 5.8% FY10F yield. Maintain HOLD. Key re-rating catalyst would be how (and at what issue price) FCT executes the planned acquisitions.