FCT – DBSV

Making the right moves

• 1Q11 earnings in line with expectations

• Positive rental renewals, lower financing cost and potential acquisition to underpin profit growth

• Maintain Buy with TP $1.73

Results in line. 1Q11 gross revenue increased by 18.5% yoy to $27.6m, while NPI rose 16.8% to $18.6m benefiting from the acquisition of NP2 and Yew Tee Point. However, on a sequential basis, gross revenue and NPI fell by 15% and 16.2% respectively due to the AEI works at Causeway Point (CP). Portfolio occupancy fell from 97.2% in the preceding quarter to 86.1% with the withdrawal of space at CP to facilitate the ongoing AEI activities. On a yoy basis, distribution income rose 2.0% to $15.0m, translating to a DPU of 1.95cts.

Leveraging on strong retail performance. A remaining 130,218sf of NLA (c17.7% of total), largely from CP, will expire in FY11. The group has renewed 27,169sf of NLA (c3.4% of total) in Q1 with leases contracted at 11.6% above the previous period. We believe similar performance for the remaining expiring leases this year would be achievable given the still low occupancy cost of 13.1% vs industry benchmark of 16-17%. Meanwhile, we expect portfolio occupancy to trough in Q2 and trend up from 3Q11 as Phase 1 AEI works at CP completes progressively. As at end 1Q11, 12.8% of the AEI is completed and 92.2% of Level 1 has been pre-committed. The group targets to achieve a 20% improvement in CP’s average rents when the exercise is fully completed. Apart from organic growth, potential acquisition of Bedok Point, recently completed, could provide further upside to earnings and valuation. Gearing remains healthy at 30.6%.

Proactive debt management FCT secured a $264m five-year loan facility in Nov 2010 to refinance its CMBS expiring in July 2011 at lower interest cost of 3% (95bps above 5-year SOR) vs 4.12% currently. The impact of interest savings will likely be felt from FY12.

BUY call retained, TP S$1.73. Maintain our Buy call with TP of $1.73. The stock offers FY11/12 yields of 5.5-5.8%, translating to a total return of 20%. No new acquisitions have been factored in, which could provide future catalysts.