FCOT – DBSV

Unlocking value in Keypoint

• Sells Keypoint for S$360m or S$1161psf of NLA

• Locks in S$75m gain, lifts book NAV to S$1.44

• Maintain BUY, TP raised to S$1.24

Proposed sale of Keypoint FCOT has announced it has entered into an agreement to sell Keypoint for S$360m or S$1161psf of NLA. The purchaser is a company jointly owned by Fragrance Group Ltd and World Class Land Pte Ltd, a subsidiary of Aspial Corporation Limited. The proposed sale price represents a NPI yield of 3.11% and the buyer is mostly likely going to redevelop the building into a residential/ commercial building. The trust has also received inprinciple approval to refresh the 62-year land lease to 99 years.

Price slightly ahead of our expectations. This is slightly ahead of our earlier expectation of S$322-351m. The sale price is also 26.3% above the latest valuation of S$285m as at Sept 2011. The sale was expected and conducted as part of FCOT’s portfolio evaluation strategy. While we are pleased that Keypoint’s occupancy, as well as rental performance for the asset has been improving, we believe the divestment will strengthen its portfolio profile taking into consideration that Keypoint has a shorter leasehold tenure. At the same time, the proceeds will provide the group greater financial flexibility to pursue acquisitions, repay debt or redeem its upcoming CPPU due for redemption in August 2012.

Locks in $75m gain. FCOT is expected to recognise a gain of S$75m from the sale and we estimate it will boost book NAV by 11 Scts to S$1.44. Assuming the proceeds are used to fully pare down debt, gearing will decline significantly to an estimated 27% from its current 40%. Meanwhile, the trust will see decent interest savings as its current all-in-interest rate is 3.9% vs NPI yield of 3.11%. Keypoint contributed about 11% to net property income in 1H12.

Maintain BUY, TP raised to S$1.24. In terms of earnings impact, while FY12 DPU will dip marginally, FY13 DPU is expected to increase by 7%to 6.9 Scts due to significant interest savings. Meanwhile, DCF valuation is raised by 9% to $1.24 with the additional cashflows from the divestment. Maintain BUY with a revised DCF-backed TP of $1.24. We continue to like FCOT for its pro-active steps to reshape its portfolio and strengthen its balance sheet. Rerating catalysts will come from its ability to enhance China Square Central and to improve occupancy, as well as to refinance its S$500m SGD loan due in November this year at a more attractive interest rate.