FCT – Diawa

Mission accomplished

Rating downgraded to 3 (Hold) from 2 (Outperform)

• We have downgraded our rating for FCT to 3 (Hold) from 2 (Outperform). Trading at a DPU yield of 6.1% on our revised FY10 forecasts, in line with the sector average, and a 12% premium to NAV (as at the end of December 2009), we believe any further unit-price appreciation will be limited for its Singapore suburban retail-mall portfolio at a time when risk premiums for defensiveness could be diminishing.

• For FY11, FCT could possibly acquire the sponsor's 81,000 sq ft Bedok Mall, a suburban mall in the vicinity of the Bedok MRT station, and similar in scale to its two most recent acquisitions, Northpoint 2 and YewTee Point. Due to the uncertainties over valuations, capital-market conditions, and the exact timing of the deal, we have not factored in any contribution from Bedok Mall.

• We have also not made any forecast assumptions for NPI improvements from its next major AEI for Causeway Point, FCT's largest property asset. Considering that Causeway Point's passing rents were just over S$10 psf for FY09, compared with over S$13 psf for Northpoint (after its recent asset enhancement), the NPI accretion from the AEI could be significant.

S$1.44 target, assuming a 5.25% effective cap rate

• We set our FCT target price of S$1.44 at parity to our RNG valuation (a finite-life Gordon Growth model). We have applied an effective cap-rate assumption of 5.25%, compared with the weighted-average cap rate of 5.76% for its portfolio, based on the most recent (September and November 2009) valuations.