FCOT – Phillip

Things Picking Up

• 1Q10 revenue of $29.6 million, net property income of $23.5 million, distributable income available to unitholders of $7.4 million.
• 1Q10 DPU of 0.24 cents.
• Total asset value of $1.9 billion.
• Fair value raised slightly from $0.17 to $0.18, upgrade to Buy

Steady showing
(Note: Financial year-end changed to 30 Sep) FCOT recorded 1Q10 revenue of $29.6 million (+19.1% y-y, +15.5% q-q), net property income of $23.5 million (+26.6% y-y, +17.7% q-q) and distributable income available to unitholders of $7.4 million (-20.2% y-y, +20.3% q-q). 1Q10 DPU was 0.24 cents (-80.9% y-y, +20.0% q-q). Underlying rental income streams were steady, the increase over prior quarters were mostly due to new acquisition and favorable exchange rates. 1Q10 revenue was boosted by the contribution from Alexandra Technopark, which was added to the portfolio in August 2009. The revenue contribution from Australia benefited from the strengthening AUD, while the Japan properties performance were largely flat. Percentage of revenue breakdown is 51% from Singapore, 35% from Australia and 14% from Japan. DPU was 0.24 cents, a big drop from a year ago, due to higher borrowing cost as well as dilution from the rights issue in 2009. However 1Q10 DPU was 20% higher than 3Q09. We believe things are already on the mend as seen from the improving numbers.

FCOT registered a slight decrease of 0.2% in its asset value. Revaluation was carried out on central Park and Cosmo Plaza. The decrease comes from Cosmo Plaza, which is being earmarked for divestment. Total asset value is $1,914.2 million.

Capital management
FCOT completed all recapitalization and refinancing activities in 2009. As at 31 Dec 2009, it has total debt of $823.8 million, of which 60% is SGD loan, 19% is AUD loan and the rest is JPY loan. The constitution of the loan is a deliberate effort by management so as to form a natural hedge on the foreign cash flows. Gearing is 40.4% and the loans are due only in 2012. We believe in the event that FCOT managed to divest Cosmo Plaza and the AWPF wholesale fund, proceeds will be used to pare down debt.

Forecasts
We are slowly gaining confidence in management execution to turn FCOT around from the time when the new management team took over in late 2008. We have seen strong support from the sponsor, Frasers Centrepoint Limited, through the injection of Alexandra Technopark. We also believed that the relationship enabled FCOT to secure credit facilities from the lenders. We did mention in previous reports that repositioning the REIT takes time and management has shown that they are delivering what they have promised. Again we like to echo our view that the transformation is not yet complete and investors have to take a long-term view. We are forecasting a FY10E DPU of 1.26 cents on the back of improving market fundamentals. We are raising our fair value from $0.17 to 0.18 derived from our DCF valuation on a WACC of 7.04%. Upgrade to Buy.