FCOT – DBSV

Waiting for the right time

• DPU of 0.31Sct (+55%yoy,+24%qoq) in line

• Singapore operations stable; Japan remains a drag

• Maintain HOLD with revised TP of $0.19

4Q10 results in line. Gross revenue and net property income was 14% and 16% higher yoy at $29.3m and $23.2m respectively due a full quarter’s contribution from Alexandra Technopark and improved performance at Keypoint with higher occupancy of c81%. On a sequential basis, 4Q10 topline was flattish, dragged down by its Japan property – Cosmo Plaza – which posted a 22% qoq decline in rental income, although NPI rose a marginal 2.3% qoq, helped by lower property expenses. Distributable income net of CPPU dividend amounted to $9.5m (DPU: 0.31Scts), up 24% qoq, thanks to the stronger AUD. The group revalued its properties up by $36.3m or 1.9% at latest cap rates of 4-5% for its properties in Singapore and lowered gearing to 39.6%.

Operations a mixed bag. Occupancy of Cosmo Plaza Osaka dropped to 25.6% with the expiry of lease of a major tenant in Aug 2010. This will continue to be a drag on earnings. Management attributed the non-traditional business location a hurdle to attract tenants. Successful divestment of this asset would improve FCOT’s book NAV and gearing. Meanwhile, Central Park and Caroline Chisholm Centre in Australia should enjoy some reversion upside from rent reviews with step-up clauses in 2011. In Spore, boost in rental income will come from higher occupancy at Keypoint.

Financing could provide earnings uplift in the medium term. Management is also looking at refinancing its debt due in 2012 (100%), given the current attractive interest rate environment, and smoothening out the lumpy loan maturity profile. We believe the group could likely achieve lower than current interest cost of 4.1% upon refinancing and boost bottomline in the medium term. This had not been factored into our existing forecast.

Maintain Hold. While yields of c6.7 – 7.1% is attractive relative to other office peers, re-rating catalyst from further clarity of management portfolio restructuring plans, appears lacking. We are revising our DCF-backed TP to $0.19 as we roll our numbers forward into FY11. Retain Hold call.