FCOT – DBSV

Focusing on Core Assets

FCOT announced that they will be divesting the units in Australian Wholesale Property Fund (AWPF) for AUD22.2m (S$29.11m). Recall AWPF was inherited from the previous ALLCO portfolio, which comprises a 39% indirect interest in an Australian registered investment scheme. Basically this fund has been a drag on earnings and valuations post the financial crisis. The fund had stopped paying dividend since March 2008 and valuation has dropped from a high of AUD$59.2 m (S$75.1m) in 2007 to AUD$24.9 (S$32.52m) as at end-2Q11.

We view this move positively as firstly, the group would immediately get rid of this drag on earnings. We do not see that this Australian fund will have much upside in the medium term. Secondly, we believe utilising the proceeds from the divestment to partially pare down an existing AUD150m term loan will lower gearing and there will likely be some interest savings which should lift bottomline marginally. Based on our numbers, post divestment gearing will drop slightly from 39.2% to 37.8% and DPU in FY 2011/12 will increase slightly by <1%. We continue to like FCOT with the manager taking proactive steps to reshape their portfolio by divesting non-performing assets including Cosmo Plaza earlier this year. We believe there are still opportunities for the group to enhance their DPU through asset enhancements and more capital management exercises.

Maintain BUY with an unchanged TP of $1.05.