FCT – DBSV

Inching in on Changi City Point’s contribution

• Results in line, DPU rises 7% y-o-y to 2.88Scts
  
• Changi City Point (CCP) acquisition to be completed in May, expect S$120m of fundraising
  
• Maintain BUY, TP S$2.13
  

Highlights

Higher contributions from Causeway Point. FCT reported 2Q14 revenue of S$41m (+3% y-o-y), NPI of S$29m (+2%). The improvement in revenue was largely driven by Causeway Point (CWP), while the remaining malls, sans Bedok Point, returned a stable performance. However, this was dampened by higher operating costs stemming from higher maintenance expenses, property tax and property manager’s fees. DPU of 2.88Scts was 7% higher y-o-y, as the Trust distributed 100% of its income available for distribution in 2Q14 vs retention of c.5% in 2Q13.

Our View

Higher retail spending compensates for lower footfalls. Shopper traffic came in at 20.4m visitors, a decline of 8%, attributable to lower footfall at Bedok Point and competition from newer malls at Jurong East. However, the Manager has guided that tenant sales have increased 2.5% for FYTD Feb, and given that (i) FCT’s major tenants include supermarkets (Cold Storage, NTUC) and departmental stores (Metro) which have seen growing retail spending, and (ii) portfolio reversions remain healthy at 9.3%, we don’t think that the decline in traffic will have too much impact on rents from FCT’s portfolio at large.

Changi City Point (CCP) to be acquired soon; contribution from 4QFY14 onwards. As previously mentioned, we have forecasted one quarter of contribution from CCP for FY14, pending its EGM. We are positive on the impact of CCP on the REIT and see upside coming from the bulk of CCP’s leases expiring in 1QFY15, and given that the Manager is looking to refresh the tenant mix, we could potentially see double-digit rental uplifts at the mall, given passing first cycle rents of S$9.08 psf. In our numbers, we have assumed EFR of close to S$120m (c.40% of total acquisition cost of CCP), gearing to settle at c. 32% post acquisition.

Recommendation

Maintain BUY, TP S$2.13. We like FCT for its ability to sustain organic rental growth momentum at CWP and Northpoint post-AEI. Furthermore, income contribution from CCP in 4Q14 should be immediately accretive to earnings for FY14. The stock is currently trading at yields of 6.3-6.8%, or 1.0 P/BV. We maintain our BUY call