Fortune – DBS

A safe play in a volatile market

At a Glance

• FY09 result was slightly above our expectation for stronger property income and lower interest expense.
• Earnings outlook should remain stable offering attractive yield
• Maintain BUY, TP raised to HK$3.71.

Result Highlights

FY09 distribution income grew 12% to HK$338m, slightly ahead of our estimate, because of stronger-than-expected property income. But DPU fell 18% to HK$0.302 as Fortune REIT financed property acquisitions primarily through rights issue.

Total revenue grew 10% to HK$701m, driven by maiden contribution from three newly acquired rental properties and improved performance of its existing portfolio. There was a modest 4.2% rental reversion for renewals. However, net property income grew only 7%, as cost-to-income ratio inched up to 27.3% from 25% the year before. Portfolio occupancy reached a new high of 96.4% at Dec 09 after vacancies at Smartland and The Household Center improved considerably in 4Q09. Interest expense fell 13% to HK$88m on lower borrowing costs, despite additional loans raised to partly fund the acquisitions. Gearing remains low at 23.7% because of larger shareholders’ equity led by revaluation surplus on investment properties. Fortune REIT has room to make yieldaccretive acquisitions worth up to HK$2.1bn without tapping the equity market, before its gearing hits the 35% ceiling limit.

Recommendation

In 2010, Fortune REIT plans to revamp and reposition City One Shatin Property to give the mall a new image and strengthen its retail offerings. Unit price of Fortune REIT has rebounded 24% from the low in September. Despite this, it still offers distribution yield of 7.4% for FY10 and 7.7% for FY11. In view of its resilient earnings and better trading liquidity postacquisition, Fortune REIT would be a safe play in a volatile market. We roll forward our valuation to FY11, with DDMbased target price of HK$3.71. Maintain BUY.