FCT – CIMB

Asset enhancement on the way

• DPU meets expectations; maintain Outperform. 2QFY10 results met Street and our expectations. 2HFY10 DPU was 54% of our full-year forecast. FY11 growth should be driven by asset enhancement at Causeway Point which could start within the year. We continue to like FCT for its resilient income streams and ability to grow organically and via acquisitions. We maintain our estimates, DDM target price of S$1.73 (discount rate 7.9%) and Outperform rating. We see stock catalysts from organic growth after Causeway Point has been enhanced.

• YTD DPU of 3.97cts met our expectations despite the retention of S$1.1m of distributable income in 2QFY10. YTD net property income of S$36.3m grew strongly by 31.8% yoy, boosted by maiden contributions from North Point 2 and Yew Tee Point in 2Q10.

• Healthy rental reversions. Average rental reversions were positive at 4.5% over preceding rents for the 50,852sf (or 6.4%) of net lettable area renewed in 1HFY10. Reversions were better in the second quarter with a 6.6% increase from the first half of 4.5%. Occupancy was almost full at 99.4%, gaining ground from the 98.6% in Dec 09.

• Upward reversions for Causeway Point from lease expiries and asset enhancement. FCT has only 3.2% of NLA from 36 leases left for renewal in this financial year. However, next year’s leases renewals would be chunky at 30% of NLA. About half of these leases, or 167,342sf, will be from Causeway Point. Separately, the manager is preparing for asset enhancement work at Causeway Point. Announcements should come before the end of 3QFY10. We believe both events represent good upward-reversion opportunities as the occupancy cost of this asset is considerably low at 12% vs. FCT’s weighted average of 14.2%.

• Bedok Mall due for completion in 4Q10. One of the key assets in the pipeline from the sponsor, Bedok Mall, should be completed by 4Q10. With an estimated 1-year gestation, we believe this asset could be ready for injection into FCT by end-CY11, likely after the completion of asset enhancement work at Causeway Point. Management guides that debt and equity will be used for this acquisition.