ALL FIRED UP
Firing on all fronts
- We have raised our DCF-backed target price to S$1.79 to account for earnings accretion from the acquisition of 257 Collins Street, and interest savings as the Trust pares down debt using its S$44.3m proceeds from the sale of the CSC hotel.
- At its current price, FCOT offers investors a dividend yield of 6.6-6.9%, which is compelling in our view.
Delivering as promised, 9% DPU CAGR over FY15-16F.
- After the expiry of the Alexandra Technopark (ATP) master lease in Aug-14, we expect NPI for the property to jump 60% in FY15, as a result of
- the Trust enjoying full underlying income contribution from the asset, which is higher than the previous master lease rent, and
- significant rental reversions as leases with low expiring rents are renewed at market rates.
- In addition, we see growth accelerating following the proposed acquisition of 257 Collins Street in Melbourne, which will contribute to an additional 13% growth in NPI for the Trust.
Secure earnings with steady growth.
- FCOT’s portfolio enjoys a high occupancy of 96.5% and a long WALE of 3.9 years.
- In addition, >30% of leases have annual rental escalations of c.3%, which provides in-built income growth.
- With no debt expiring until FY17, and close to 80% of interest costs hedged into fixed rates, the Trust is well positioned to ride out the economic downturn in Australia, as well as near-term interest rate volatility.
Valuation:
- We maintain our BUY call and raise our DCF-based TP to S$1.79.
- At its current price, FCOT offers investors a dividend yield of c.6.6-6.8% over FY15-16F, which is highest amongst office-focused S-REITs.
Key Risks to Our View:
- Unfavourable forex movements.
- As FCOT derives c.49% of its income from AUD while distributions are based in SGD, foreign currency fluctuations will have an impact on distributions. The Manager has hedged out its AUD exposures on a rolling basis of 6-9 months.
(Rachael TAN; Derek TAN; Mervin SONG, CFA)
Source: http://www.dbsvickers.com/
