FCT – DBS

Stepping Up

• Acquiring Northpoint 2 & YewTee Mall for S$290.2m
• A combination of debt and equity to fund purchases
• Merits aplenty, Maintain BUY

Acquiring 2 malls at one go. In a much-anticipated move, FCT announced the acquisition of Northpoint 2 and Yew Tee Point – two good quality suburban retail properties for a total consideration of S$290.2m. When completed, FCT’s total portfolio value will increase by 25% to cS$1.5bn. An EGM to approve the transaction is scheduled on 25 Jan 2010.

Finding optimal funding structure. The deal is accretive as the initial yield of the properties average 5.8% and compare favorably to the current implied portfolio yield of 5.5%. However, the quantum of DPU
enhancement will depend on the finalization of the funding structure. In addition to taking on new debt, FCT is proposing to issue up to 152m new units. Based on an estimated debt/equity funding ratio of 45/55,
which will result in gearing increasing slightly to 33.4% by FY10, and pricing of the new units ranging between $1.10-1.50/unit, FY10 DPU maybe enhanced by 0.3-5.7%.

Bigger, better, stronger – post acquisition. When completed, we see FCT emerging as a stronger entity, benefiting not only from higher efficiencies from a larger asset base as well as increased diversification of its property and tenant mix. The fund raising exercise is expected to propel it into the billion-dollar market cap club and increase trading liquidity due to higher free float, thus providing another catalyst for a further stock re-rating. FCT’s sponsor has undertaken to only subscribe for the units in the event of poor participation of the private placement, an event we view as unlikely.

Maintain BUY, TP S$1.63. We have tweaked our current DPU estimates, which have already included the new acquisitions, to incorporate the latest transaction details. We continue to favour FCT as the purest suburban retail Sreit and its visible acquisition pipeline. Maintain BUY with a revised TP of $1.63.