FCT – CS

3Q10 results in line; announces AEI for Causeway Point

● 3Q10 DPU of 2.07Scts (+6.7% yoy, +0.5% qoq), brings 9MFY10 to 6.04Scts, in line with our and consensus FY10 estimates of 8.1-8.2cts. Revenues grew 45% yoy to S$30.7mn mainly on NP2 and YTP which were acquired in Feb 2010.

● 3Q10 occupancy remained steady at 99.4%, while rent reversions were strong at 8.5% on average, from AP and CWP. Gearing is 31.2% with cost of debt of 3.76%.

● As expected, FCT has announced the AEI programme for its largest asset, Causeway Point (CWP). Spanning 30 months starting from July 10, it will raise NPI by 22% to S$51.5mn. It is expected to be done in phases and management expects that at the peak of works, likely in 2011, occupancy will be 70%, and earnings should pick up substantially from 2012 as higher rents from rejuvenated space flow through.

● We reduce FY11e DPU forecast by 4%, but raised DDM-based TP to S$1.60 from S$1.58, on higher rental contributions from CWP beyond 2012e. FCT offers steady 5.8-6.5% FY10-12e yields.

Strong contributions from new acquisitions.3Q10 revenues rose 45% to S$30.7mn, and NPI rose 46% yoy to S$21.5mn, mainly on contributions from Northpoint 2 and Yewtee Point which were acquired in Feb 2010, and strong rent and occupancy improvements in Northpoint post AEI. DPU growth was 6.7% yoy on higher interest expense and an enlarged share base. Including the S$1.2mn retained in 1H10, management retained S$1.6mn of distributable income for distribution in 4Q10, to smooth out earnings as 4Q10 could be affected by the AEI works at CWP.

Causeway Point AEI to generate 13% ROI. As expected, FCT has announced the AEI programme for its largest asset, Causeway Point (CWP). Spanning 30 months starting from July 10, it will raise rent by 20% to S$12.20/sqft/mth, from the current S$10.20, and raise NPI by 22% to S$51.5mn, an ROI of 13% based on S$71.8mn of capex. It is expected to be done in phases and management expects that at the peak of works, likely in 2011, lowest occupancy will be 70%, and earnings should pick up substantially from 2012 as higher rents from the rejuvenated space flow through. It expects the capex to be evenly spread out throughout the 30 months, and would be funded by its revolving credit facility which cost less than 2% currently. This could be termed out as it approaches a sizeable amount.

Cut FY11e earnings by 4% for downtime. We expect occupancy at CWP to average to 90% in FY11 and 98% in FY12 as the AEI works are carried out in phases. We estimate revenues and NPI would be most affected in FY11, which leads to a flat DPU in FY11, but would improve by FY12 where DPU would improve 12% yoy. As a result, we have adjusted FY11e forecasts by -4%, while FY10 and FY12e earnings are relatively unchanged. We have raised our DDM-based TP marginally to S$1.60 from S$1.58, mainly from stronger earnings beyond 2012 due to the AEI, which are partially offset by lower DPU in FY11e.

Medium-term catalyst: acquisitions. FCT still has a substantial acquisition pipeline from its Sponsor, Frasers Centrepoint, which includes Bedok Mall (81,666sqft, under construction, to be completed by 2H10), The Centrepoint (392,100sqft), and a mall at Changi Business Park (c.200,000sqft, under construction, to be completed by end-2011). This could add up to 84% to its asset size of 797,433sqft, and double its asset value of S$1.4bn. We view this as a medium term catalyst.