FCT – CIMB

Operationally strong

FCT’s 3QFY9/14 results were largely in line, with 9M distributable profit at 75% of our full-year forecast. Gross revenue and net property income were up 2-3%, as the better performance at key malls had more than offset the weak performance at Bedok Point. FCT remains our top pick in the retail REITs space as we believe it is strong operationally with growth expected from both rental reversions and CCP contributions. We maintain our Add rating and raise our target price slightly to S$2.18 as we roll forward our estimates. We lift our FY14-15 EPS by 0.6-1% as we factor in lower interest costs.

Results and operations highlights

FCT continued to grow operationally during the quarter. Portfolio occupancy grew to 98.5% from 96.8% in the previous quarter, as occupancy at Bedok Point improved to 99.3% from 77% with the lease commencement of several tenants. There was an average 7.8% rental reversion in the quarter. Tenant sales and occupancy cost remained flat yoy.

Healthy balance sheet, potential interest savings

FCT’s gearing increased to 30.2% post the Changi City Point (CCP) acquisition, but it was still well within the S-REITs’ peer average of 32.9%. In the results conference call, management said it believes interest rates are likely to stay low, and hedged 75% of the company’s debt, instead of 94% previously. This resulted in a lower interest cost of 2.50% as opposed to 2.85% as of end-FY2013, and is likely to lead to interest savings and slightly higher distributions in the coming quarters.

Outlook

We expect FY2015’s revenue to grow by 14% yoy, largely from the CCP acquisition. Additionally, we believe organic growth will be driven by the 39% and 27% of leases (by gross rental income) expiring in FY2015 and FY2016, with the majority of the expiring leases emanating from Causeway Point, Northpoint and CCP. We believe CCP will experience a 20-30% positive rental reversion being its first rental cycle, and low passing rent of ~S$9 psf. FCT remains our top pick in the retail space as we like the resilience of its suburban mall offerings and growth profile from both the CCP acquisition and positive rental reversions.