FCT – Daiwa

Potential price drivers are well known

What has changed?

• Frasers Centrepoint Trust (FCT) announced its 2Q10 (FYE June) results on 23 April 2010. The distribution per unit (DPU) of 2.06¢ was 1.5% above forecast.

Impact

• Gross revenue was 1.6% better than our forecast, due largely to higher-than expected (non-rental) revenue from Causeway Point, while net-property income (NPI) was 5.9% above our forecast due to lower-than-expected operating expenses at Northpoint and Anchorpoint (as well as the revenue from Causeway Point). FCT achieved an average rental-reversion increase of 6.6% for renewals and new leases for the quarter. The contributions from the new acquisitions were in line. Higher-than-expected management fees, borrowing costs, and the retention of about S$1.1m in distributable income offset the strong showing at the NPI level.

• We have revised up our DPU forecasts by 0.7-1.7% for FY10-12, after revising up our NPI forecasts by 1.2-1.8% and adjusting downward our net tax adjustments assumptions. Our forecasts do not include any asset-enhancement initiative (AEI) assumptions for Causeway Point. The manager indicated that it expects to announce plans for this project before the next results briefing. The manager expects the construction of Bedok Point (by the sponsor) to be completed in early 4Q10. FCT acquired Northpoint 2 and YewTee Point from the sponsor about one year after they were completed. Given the relatively minor DPU accretion for these two acquisitions (based on the circular forecast), we have not included Bedok Point in our forecasts or valuation.

Valuation

• We have raised our six-month target price, based on our parity to our RNG (a finite-life Gordon Growth model) valuation, to S$1.46 from S$1.44. Our valuation assumes an effective cap rate of 5.25% (a discount rate of 7.75% and an internal growth rate of 2.5% for the remaining leasehold period) for FCT’s portfolio. For Causeway Point, we have assumed a mid-cycle passing rent of S$11 psf.

Catalysts and action

• We maintain our 3 (Hold) rating for FCT, which looks nearly fully-valued (already trading at an 18% premium to its NAV as at 31 March), given the marginal upside to our target price. We also believe the potential unit-price drivers (Causeway Point AEI and Bedok Point acquisition) are well known.