FrasersCT – OCBC

3Q beats forecasts

3Q was better than expected. Frasers Centrepoint Trust’s (FCT) delivered 3Q07 revenue of S$18.9m, up 4.0% YoY, with distributable income of S$10.3m and DPU of 1.67 cents. Distributable income was higher than FCT’s own forecast by about S$1.2m and this was attributed to higher Other Revenue and Income support from its sponsors due to the renovation works at Anchorpoint. The results beat our estimates by about 5%.

Completed acquisition of H-REIT. In the last quarter, FCT announced the completion of the acquisition of a 27% stake in Hektar REIT (H-REIT), a Malaysian retail REIT for S$46.6m as well as a 40% stake in the manager, Hektar Asset Management Sdn Bhd. FCT will fully fund these investments by debt. Even though the current investment into H-REIT is small (H-REIT’s two assets are worth RM523m), and the accretion to DPU is minimal at 0.21 cents, we nevertheless view these investments positively. This is because H-REIT has good growth potential. It has a pipeline of acquisitions that could potentially grow its NLA by 2.3x over the next 3 years. More importantly, these investments provide FCT with an additional avenue of
growth as well as a platform for it to get into the retail market scene in Malaysia.

Asset enhancement on Anchorpoint to complete in 1Q08. FCT is presently revamping Anchorpoint Shopping Centre (ASC). It is repositioning ASC as a village mall concept, offering a wider range of F&B outlets. The project is slated for completion in Nov 2007 and thus will only impact earnings from 1Q08. In terms of lease commitments, FCT has already or is near to securing about 80% occupancy and we do not see an issue in getting 100% commitments by November with the current boom in the retail market space. Beyond ASC, asset enhancement works (AEW) are likely to be carried out at Northpoint and Causeway Point. These projects
are likely to have greater impact on FCT’s earnings due to their significantly larger spaces. However, we do not expect the completion of AEW at Causeway Point until 2008.

Maintain HOLD. While we are positive on FCT’s new growth initiative coming from H-REIT, presently there is not much clarity on the DPU accretion from this acquisition. Hence, we have not factored in this in our valuation. We would prefer to wait for more news before revising our rating and fair value of S$1.67. We thus maintain our HOLD rating for now.