FCT – DMG

Proposed acquisitions set to be yield accretive

New acquisitions to grow AUM by 25% to S$1.5b. FCT announced the proposed acquisitions of Northpoint 2 and YewTee Point for S$165m and S$126m, respectively. The acquisitions will grow FCT’s portfolio value to S$1.5b and enhance its position in the resilient suburban retail property market as well as improve income diversification. Maintain BUY, TP of S$1.66.

Strong traffic footfall expected with strategic connectivity. Northpoint 2 and YewTee Point are strategically located in high density residential estates, both of which are located close to major transportation nodes, which deliver high shopper traffic to the malls. Occupancy for both malls stand at almost 100% with average passing rents at between S$12-13/sqft.

Acquisition likely to be yield accretive. Management indicated that the NPI yields from these acquisitions work out to be 5.8%, in-line with our estimates. The final funding structure has yet to be put in place. However, management has set out a realistic illustrative debt/equity structure of 45% and 55%, respectively. This suggests a debt requirement of S$130.6m, raising gearing from 30% to 33%. Approximately 128m new units may be issued at S$1.30, raising its share capital by 20%. Under the current capital financing structure, we expect FCT’s WACC to be ~4.9%, implying a DPU accretion of ~3.5%.

Expanded AUM may address liquidity and compress yields further. With a low cost of equity, we expect the above acquisitions to be accretive, strengthening FCT’s retail oligopoly status in the northern region of Singapore. With an expanded AUM and equity base, concerns over FCT’s poor stock liquidity will be addressed. We expect a further re-rating on the stock as yields could compress closer to its heyday levels seen in 2006-08. We maintain our earnings forecast as we have previously factored these acquisitions. We raise our TP to S$1.66 from S$1.53 to account for higher terminal growth rate assumption of 3% (2.5% previously). At our TP, FCT trades at 5% FY10 yield, a reasonable peg, in our view. Note that FCT traded at 4.6% during heydays of 2006 and 2008, suggesting that the stock has further legs to ride up the
economic recovery.