FCOT – CIMB

Management scores again

FCOT’s sale of KeyPoint for3.1% yield and an estimated S$73m gain is a major positive, in our opinion, opening doors to options, all of which could be accretive for unit-holders. We continue to expect stock outperformance, as management continues to deliver.

We keep DPU estimates unchanged pending EGM approval of the deal (expected in Jul) though we believe unit-holders are likely to approve. Maintain Outperform and DDM target price (discount rate: 9.4%).

What Happened

FCOT will be selling KeyPoint for net proceeds of S$357.8m (S$1.2k psf, S$73m above book value of S$285m) for a tight yield of 3.1%. The buyer is a company jointly owned by Fragrance Group and World Class Land Ltd. Proceeds will be used to lower asset leverage. As expected, management won’t be paying out capital gains.

What We Think

The sale is not a major surprise given previous news reports of management’s intention and based on past conversations with management. Management had, in fact, somewhat “dragged its feet” on this long-awaited S$ refinancing. Assuming all the proceeds are used to lower debt, we estimate that asset leverage will drop near 28%. Qoq fluctuations from a loss of income from KeyPoint should be minimised by its recently-acquired 50% stake in Caroline Chisholm Centre, and also adequately compensated by interest cost savings upon any debt repayment (estimated S$ cost of borrowing of 3.8-4.0% vs. divestment yields of 3.1%), assuming no major time lag.

Management should be able to gear up eventually at low costs of borrowing to :1) redeem its 5.5% CPPU; 2) buy back shares at current yields of 7-8% (both immediately accretive); and/or 3) buy Valley Point and/or Alexandra Point from its sponsor (less accretive but expanding its asset base). All combinations should work out positively for unit-holders.

What You Should Do

The deal is a major positive, further bolstering our confidence in management. Maintain Outperform.