FCOT – CIMB

Steady quarter; catalysts intact

With stronger occupancy, we believe FCOT can tide through tough times better than before. Refinancing catalysts are intact. We also expect buffers against office headwinds from master and long leases.

4Q11/FY11 DPU is in line with our estimates though slightly below consensus, at 26%/100% of our FY11 estimate. We lower our DPU estimates and DDM-based target price (discount rate 9.4%) on interest-cost adjustments. Maintain Outperform on refinancing catalysts.

Boost from occupancy

We believe FCOT is better-positioned to handle tough times this time round, given stronger asset occupancy and support from master/long leases. Management notes slower leasing but expects support from healthy occupancy and low rents. FY11 NPI grew 3% yoy on stronger contributions from almost all its self-managed assets. 4Q occupancy surged to 98% from 91% last year on proactive leasing with KeyPoint chalking up its 10th straight quarter of occupancy improvements, to 88%.

Upside from China Square

We believe direct management of its largest asset, China Square Central, could provide upside. Management guides that net operating income for underlying leases here exceeds that for its master lease. Underlying occupancy is healthy at 95.7% while recent signing rents are S$6.30-8psf vs. expiring rents of S$6psf.

Refinancing catalysts

A 50bp margin reduction (all debt due in FY12) is expected to lift DPU by more than 10%. Management will focus on its A$ debt first. Given rising uncertainties, it could be more proactive in refinancing its S$ debt though we believe the timing could be affected by its decision for KeyPoint. There are no penalties for early refinancing.

Keeping mum on KeyPoint

Management has not confirmed recent news reports on the closure of expression of interest for this asset. It maintains that its move is largely exploratory.