FCOT – CIMB

What next after CPPU redemption?

After a series of yield-enhancing activities and portfolio restructuring in FY12, FCOT is in an enviable position asDPUgrowth is built-in through FY15 andasset leverageof 31% providesit withthe financial flexibility to do more.

We adjust FY13-15 DPUs by between -5% and +2% for the changes to NPI margins, timing of CPPU redemption in FY13, and upside from Alexandra Technopark in FY15. We maintain Outperform with a higher DDM-based target price (discount rate: 7.7%). We see catalysts from more yield-enhancing actions.

FY13 growth locked in; in-built growth till FY15

2012 marked a turning point for FCOT when management successfully restructured its asset portfolio and engaged in yield-enhancing activities. With the recent completion of a 48% CPPU redemption, management has locked in a nice 12% DPU uplift for FY13. Ongoing back-filling and positive rental reversions on its under-rented local office assets should extend DPU growth into FY14. Meanwhile, underlying NPI on Alexandra Technopark has already surpassed that provided by its master lease, which could provide another layer of uplift come FY15 when the master lease lapses.

Ammunition to do more

Asset leverage at 31% after its recent CPPU redemption leaves FCOT with the financial flexibility to do more. We expect FCOT to relook at hotel redevelopment plans over the next year, where it could sell the site and redeploy proceeds into accretive CPPU redemption. Management is also on the lookout for acquisitions, failing which it still retains the financial flexibility to redeem all its remaining CPPUs for ~10% DPU accretion while keeping asset leverage at levels of 40%.

Maintain Outperform

With DPU growth of 6-12% over FY13-15, FCOT‟s growth visibility is one of the strongest among S-REITs. This is further backed by undemanding valuations (0.9x P/BV and forward yields of 6-7%). We maintain Outperform and see upside from a gearing-up for acquisitions, CPPU redemption, and asset enhancements.