FCT – RBS

A prime suburban mall play

FCT’s strong acquisition pipeline and pure prime suburban mall exposure puts it ahead of other retail plays, in our view. Suburban mall rent outperformed other malls; meanwhile its parent’s Bedok Point mall is nearing completion. Buy.

Bedok Point may be ripe for acquisition early 2011

Bedok Point, a suburban mall owned by parent F&N is nearing completion. Given the mall is more than 90% pre-committed, injection into FCT may occur early next year. We value Bedok Point at S$130m. While FCT has the debt capacity to fully fund this, we believe an equity raising is likely in order to keep gearing at below 40%. F&N’s 50%-owned Changi City Point is due to complete in 2H11 and may be injected to the REIT in 2012, in our view.

Suburban malls outperform all retailers

Prime suburban malls rents improved 1.4% hoh to S$28.50 psf in 1H10, according to CBRE, vs a 4.1% decline for prime Orchard Road rents and a 6.5% fall in rents for city fringe malls. Prime suburban malls continue to be in demand, with six bids received for a predominantly retail site at Jurong Lake District. Top bidder Lend Lease paid S$749m, or S$650 psf, for the site, which seems high relative to CapitaMall Trust’s Jurong Entertainment Centre’s current valuation of S$750 psf. We estimate a construction cost of S$300 psf for the Jurong Lake site. We believe FCT will benefit, as it is the only pure suburban retail play in Singapore.

Refinancing ahead of time

FCT is in the midst of refinancing its debt of S$260m due in July 2011 (57% of total). We expect debt cost for this to fall to 3.5% from 4.1%. This should bring its average debt cost to 3.5% next year, vs 3.8% now. We have added 2c/share to FCT’s valuation based on this.

Valuation comment

We maintain Buy on FCT with our DCF-based target price of S$1.74. Catalysts would include the potential acquisition of Bedok Point likely in early 2011. FCT yields 5.7% in FY10F and 5.4% in FY11F. The declining yield is due to temporary loss of income as Compass Point is now undergoing refurbishment. We prefer FCT to CapitaMall Trust due the strength of the suburban retail market and FCT’s strong acquisition pipeline.