FCOT – Phillip

1QFY11 Results

•1Q11 revenue of $29.0 million, NPI of $22.9 million, distributable income of $7.9 million

•1Q11 DPU of 0.25 cents

•Divestment of Cosmo Plaza a positive

•Maintain Hold, target price $0.18

1Q11 results came in without much fanfare. Revenue was $29.0 million (-1.1% q-q, -2.3% yy), net property income was $22.9 million (-1.2% q-q, -2.4% y-y) and distributable income of $7.9 million (-16.9% q-q, +6.7% y-y). DPU for the quarter was 0.25 cents (+4.2% y-y). Cosmo Plaza continued to be the drag in the quarter, contributing an operating loss to net property income. Distributable income and DPU improved y-y due to an absence of realized loss on derivative instruments a year ago. Operationally, the rest of the portfolio performed in-line with expectations. Portfolio occupancy showed slight improvement from the last quarter from 90.8% to 91.8%, but dropped 1.1% from the same period a year ago. Singapore portfolio experienced improvement in occupancy rate, however negative reversion was seen at 55 Market street, this corroborates with our view that the office sector might still be experiencing negative reversion from renewal of leases signed in pre crisis days. At the other Singapore property, Keypoint, management effort in asset enhancement and repositioning is seeing results. Occupancy rate has risen almost 10ppt from a year ago. The Australia and Japan portfolio delivered stable results, excluding Cosmo Plaza.

Painful but necessary decision

Subsequent to the 1QFY2011 quarter, FCOT finally sold Cosmo Plaza in Jan 2011. This is an almost cashless transaction whereby the sale consideration is simply JPY4 (S$0.06). In return, FCOT lightens its balance sheet with the transfer of JPY3.8 billion in loans to the buyer. In retrospect, the building was acquired in 2007 for JPY6.5 billion. Current valuation is JPY3.1 billion. Over the years, Cosmo Plaza contributed $7.7 million in net property income. We may be off in our numbers, but Cosmo Plaza represents substantial value destruction. We think the building is a bad piece of legacy which the present management inherited from its predecessor. With the divestment, gearing is lowered to 38% with total debt of $775.2 million.

One down, one to go

With Cosmo gone, there is just one white elephant left on the balance sheet. FCOT has not received dividends from AWPF since 3Q08. Latest valuation is AUD24.9 million (S$32.5 million). In the event of a successful recycling of this capital to reduce debt, gearing could be lowered further to 37%. Again we feel that management has delivered on its strategy. We are slowly witnessing results of the transformation. Core portfolio is delivering stable performance. FCOT has secured higher committed occupancy commencing in the coming quarters which should helped to bolster the forthcoming results. FCOT currently trades at 0.6x book value. We are maintaining our Hold recommendation and target price of $0.18.