• FCT has priced its placement of 48 mln new units at $1.39 each, top end of the proposed $1.35-1.39 range, as a result of strong demand.

• The placement was 4x subscribed by new and existing institutional investors, hence the low 2.5% discount to yesterday’s adjusted volume weighted average price of $1.426.

• The $64.3 mln net proceeds are to part finance the $129 mln acquisition of Bedok Point, which brings to 5 suburban malls in FCT’s portfolio.

• The acquisition is yield accretive.

• Based on minimum 8.42 cents DPU for ye Sept ’11, FCT offers 5.8% yield.

• Major enhancement works at Causeway Point, FCT’s biggest asset, are largely completed, which suggests the recent mild decline in Net Property Income will be more than made up for in ye Sept’12.

• We maintain BUY.

• The proposed acquisition of Bedok Point (Net Lettable Area of 80,985 sf) from Fraser & Neave for $127 mln is yield accretive based on $7 mln income in the “first lease cycle”.

• Before taking into account debt financing options (combination of debt and issuance of new units), the yield of already 5.5% compares favorably with FCT’s yield of 5.3% based on expected DPU of 8.2 cents for year ending Sept’11.

• Note the June’11 quarter was affected by lower Net Property Income because of the extensive $72 mln refurbishment at Causeway Point, which is FCT’s biggest asset, with NLA of 418,543 sf.

• Refurbishment has caused the occupancy to drop to 69% during the March’11 quarter before rebounding to 78% in the June quarter. By end Sept’11, management expects the level to rise to >90%, hence its confidence in paying no less than 8.2 cents for ye Sept’11 as for the previous year.

• Bedok Point brings to 5 suburban malls in FCT’s portfolio. The next acquisition is expected to be Changi City Point (207,479 sf) and likely to take place in fiscal year ending Sept’12.

• Another attraction of FCT is that a whopping 43.2% of its portfolio is due for rental reversion, and hence likely DPU increase in FY2012.

• We maintain BUY.

Portfolio expansion move

• As expected, FCT is acquiring Bedok Point for S$127m

• Accretive deal, reviewing funding options

• Maintain Buy, $1.73 TP

Acquires Bedok Point. FCT announced that it is purchasing Bedok Point from sponsor, Frasers Centrepoint for S$127m or S$1,568psf of NLA. All-in-cost works out to S$129.2m or S$1,595psf. Bedok Point is a four-storey 80,985sf NLA suburban shopping mall located within the established high population density Bedok housing estate and is well served by public transport facilities such as the Bedok MRT station and bus interchange. It enjoys a high volume of captive shoppers and has seen approximately 5.2m footfalls in the first 6 months of opening. Current occupancy is at 97.4% and tenants comprise mainly F&B and entertainment shops.

Price within expectations, further room for upside. We view this deal as positive as it will expand FCT’s asset size by 8.4% to S$1.66b while keeping its pure suburban focus. The acquisition price is in line with recent FCT and CMT mall valuations of around S$1,600-2,200psf while NPI yield based on current occupancy and monthly gross rents of S$11psf/mth works out to be about 5.6% with room to improve to 5.7-5.8% when fully leased. In the medium term, we believe there are opportunities for growth in yields through (1) improving the existing property efficiency of 60% (2) upward adjustment in rental in the first rental renewal cycle given that current rents are slightly below the suburban rents of S$12-14psf/mth.

The manager is reviewing funding options including a combination of debt and equity sources. Current gearing is at 31.7% and full debt financing would lift the ratio to 36-37%. In our scenario analysis, we have assumed between 40-60% of the acquisition value to be equity funded. This would result in a 4-4.7% boost to FY12F DPU while DCF-backed target price would remain relatively unchanged. These have not been factored into our current forecast.

Maintain Buy. We retain our Buy call on FCT. The stock is trading at current pre-acquisition FY11-FY12 yields of 5.5-5.8%. This is an attractive 344-374bps over the 10-year bond yield. Current target price of S$1.73 offers total return of 18%.

FCT buying Bedok Point for $127m

FRASERS Centrepoint Trust (FCT) is buying Bedok Point for $127 million from its sponsor, Frasers Centrepoint Limited – the property arm of Fraser and Neave (F&N) – using a mixture of debt and equity.

The market has been expecting the acquisition, so the spotlight is now on the number of new units FCT could issue and the potential issue price.

FCT said yesterday that it is likely to conduct a private placement, but it gave no other details on the exercise. It will inform unitholders of the details of the financing structure ‘in due course’.

Bedok Point is a four-storey mall at Bedok town centre, with a net lettable area of 80,985 square feet. It commenced operations in December 2010 and was 97.4 per cent occupied as at June 30. It will be the fifth mall in FCT’s Singapore portfolio and will boost the retail real estate investment trust’s (Reit) asset size to $1.66 billion from $1.53 billion.

The price of $127 million is the average of two valuations – $128 million and $126 million – by independent valuers.

‘Our unitholders can expect to enjoy higher distribution per unit from this yield-accretive acquisition,’ said CEO of FCT’s manager Chew Tuan Chiong in a press release.

FCT is in the process of determining an optimal debt and equity-financing plan for the purchase, said Dr Chew at a separate briefing. Through the issuance of new units, the Reit can also increase its free float, he added. As at July 28, F&N held a 43.2 per cent interest in FCT and is its single largest unitholder.

Dr Chew was unable to comment on the amount of discount the new units could be priced with, but he pointed to FCT’s earlier private placement for the purchase of YewTee Point and Northpoint 2. When the exercise took place amid a ‘very volatile’ market in early 2010, the new units were priced at a 3.7 per cent discount to FCT’s adjusted volume-weighted average unit price.

Moody’s Investors Service said that the acquisition has no immediate impact on its Baa1 corporate family rating on FCT, and the rating outlook is stable.

DMG & Partners Research raised its target price for FCT to $1.79 from $1.77 and maintained its ‘buy’ call on the counter.

FCT gained half a cent on the stock market yesterday to close at $1.54. Meanwhile, F&N rose five cents to close at $6.

The conglomerate will be re-investing net proceeds from the sale of Bedok Point.

Waiting for year-end bonus

At a Glance

• In line with expectation and on track to meet our full year estimates.

• 51% of completed CWP AEI works at prime levels to underpin earning growth; DPU accretive Bedok Point acquisition likely within next quarter.

• Maintain BUY, TP $1.73 for 17% total return

Comment on Results

FCT 3Q results is in line with expectations. The 11.1% and 13.4% yoy decline in gross revenue and net property income to S$27.3 m and S$18.7 m respectively were expected. Lower contribution from Causeway Point (CWP), currently under

renovation, was the key factor but performance was partially offset by the stable occupancies at its other retail malls as well as healthy rental reversions (+3.8%) enjoyed in 3Q. On a q-o-q basis, gross revenue and NPI dipped marginally by 3.5% and 4.0% respectively. Distributable income was S$15.08m (-5.8% yoy, -5.7% qoq) including the S$0.3m retained from the previous quarter, translating to a DPU of 1.95 Scts. DPU achieved in the first 3 quarters form c.72% of our full year estimates and we believe that the group is on track to meet our estimates.

Improving occupancies at CWP to underpin earning growth. Portfolio occupancy increased from 83% a quarter ago to 88% in 3Q with the completion of 51% of the AEI works at CWP. They are mostly at B1 and Level 1, the most prime space of the mall. CWP’s occupancy rate rebounded from 69% to 78% and should hover above 90% from 4Q11 onwards. About 95% of the AEI works has been pre-committed and is expected to see at least a 20% increase in average rent from the current S$10.2 psf pm post AEI works. Meanwhile, the group has refinanced S$260m with a 5-year loan facility at a more attractive rate, lowering all-in interest rate from 3.83% to about c.3.68% and should enjoy some interest savings going forward. Gearing is at a healthy 31.7%.

Recommendation

We believe that the group is on track to meet our estimates on the back of strong portfolio performance. Our forecasts exclude acquisition of Bedok Point, which will likely materialise within the next quarter. The stock offers FY11/12F yields of 5.4%-5.7%, translating to a total return of 17%.