FCT – Daiwa

Risk-return looks favourable now, in our view

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

• We have upgraded our rating to 2 from 3. Although we believe the price drivers are well-known, the risk-return ratio has improved after the most recent three-month unit-price correction, in our view. We maintain our six-month target price of S$1.46 based on parity to our RNG valuation (a finite-life Gordon Growth model).

Immediate catalyst from Causeway Point AEI

• FCT’s immediate price trigger could be management’s asset enhancement initiative (AEI) plans for Causeway Point, which accounts for more than 50% of the overall portfolio value. Our earnings forecasts, which assume passing rents rising to S$11/sq ft by FY13 (with no assumptions for asset enhancement) for Causeway Point, could be revised up on higher rental assumption guidance from management upon the announcement of the AEI. Other earnings and unit-price catalysts could come from a better-than-expected contribution from Northpoint 2, post the AEI, and better visibility on the future acquisition of Bedok Point and possibly One @ Changi City (a 127,490-sq-ft joint venture between the sponsor and Ascendas [Not listed] at Changi Business Park scheduled for completion in 2011).

Major risk: suburban retail is no longer a secret

• The keen investment interest in early 2010 for suburban shopping malls within the public-housing heartlands suggests to us that it might be difficult now for the sponsor to develop (at an attractive rate of return) any more of these prized assets. FCT eventually might have to find revenue growth in overseas.