FCOT – OSK DMG

Reaping What Has Been Sowed

FCOT reported 2QFY13 DPU of 1.99 cents (+14% y-o-y). Together with its 1QFY13 DPU of 1.58 cents, 1HFY13 DPU accounts for 43.4% of our full year forecast. With the main boost in DPU (a result of the buyback of c.96% of CPPU) to come through in 2HFY13, together with its resilient portfolio and bright prospects, we maintain our BUY rating on FCOT with a higher DDM based (COE: 7.1%; TGR: 2.0%) TP of SGD1.65.

Higher DPU mainly due to CPPU redemption. The higher dividend per unit (DPU) was mainly attributed to the redemption of convertible perpetual preferred units (CPPU) which was costing FCOT an average 5.5% annually at the DPU level. Together with the redemption of 45.9% of the total CPPUs originally issued in April, only 4.2% of the original number of CPPUs issued remains outstanding. As the amount of CPPUs available has significantly decreased, we expect FCOT’s DPU to grow by c. 23% and c.11% in FY13 and FY14 respectively.

More positive rental reversion from China Square Central. Its management indicated that the pre-commitment rate in China Square Central reached a stable 92.6% from the actual occupancy of 73%. With this increase, we expect FCOT to benefit from the additional income in the coming quarter. As the asset enhancement initiatives (AEI) remain on schedule and its passing rental rate is at a low of SGD6.60 (vs current market Grade B office rate of SGD7.10 psf/mth), we also expect FCOT to enjoy a c.5-10% positive rental reversion for the leases due to expire (which makes up c.6.1% of total portfolio income) in 2013.

Strong portfolio occupancy. With the pro-active management of its properties, the occupancy rate of FCOT’s portfolio has hit a high of 95.3% (Singapore properties – 93.1%, Australia properties – 99.5%). Together China Square Central’s improved occupancy rate, we expect the overall occupancy rate of this trust to continue growing in the coming quarters.

Maintain BUY with higher TP of SGD1.65. Going forward, we expect FCOT to continue to register stronger DPU as the trust: i) reaps the full year benefit from the acquisition of another 50% of interest in Caroline Chisholm Centre and ii) benefits from CPPU buyback. Given its bright prospects and strong portfolio, we favour FCOT for its attractiveness and maintain our BUY rating on this counter with a higher DDM based (COE: 7.1%; TGR: 2.0%) TP of SGD1.65.