FCT – CIMB

Asset enhancement starts at Causeway Point

• Results exceeded expectations; maintain Outperform; target price raised to S$1.84 (from S$1.73). 9M10 DPU was above our expectation (82% of our FY10 forecast) though in line with consensus (75% of consensus). The strong performance was attributed to stronger-than-anticipated reversions for Northpoint after asset enhancement and assumption of fewer new units placed out. Management announced asset-enhancement plans for Causeway Point which have just commenced. We increase our base rental assumptions for Northpoint, and factor in the impact of the Causeway Point asset enhancement. Our DPU for FY10 increases 8.5% after higher rental assumptions for Northpoint but falls 2% for FY11 (peak of refurbishment work) before rising 6.8% for FY12. Our DDM target price rises accordingly to S$1.84 from S$1.73 (unchanged discount rate 7.9%). We continue to like FCT for its strong organic growth potential and clear acquisition pipeline from its sponsor.

• 9M10 net property income up 37% yoy, reflecting improved Northpoint contributions after its asset enhancement and maiden contributions from newly acquired Northpoint 2 and Yew Tee Point. There were only seven leases up for renewal in 3Q10, all rising 8.5% over preceding rents, and translating into 2.8% annual growth. Portfolio occupancy was unchanged at 99.4%.

• S$71.8m over 30 months to refurbish Causeway Point. Management has started to refurbish its single largest asset, Causeway Point. Work will include downsizing anchor tenants from the current 65% to 50% of NLA, relocating escalators away from prime space, and building more pro-family features. As revenue contributions form 55% of FCT’s portfolio, asset enhancement will be spread over 30 months to minimise the impact on distribution. Guided ROI is 13% for the S$71.8m capex which is expected to be moderately frontloaded. Some revenue shortfall is expected in 4Q10 as some leases will be pre-terminated to facilitate the refurbishment. However, management expects forward leasing for new space to mitigate the nearterm shortfall in revenue. Management will be fully funding the capex with revolving credit. Cost of borrowing is expected to be under 2%