FCOT announced stellar FY9/13 results with DPU growth of 19%. As some of its leases are at below-market rates and the outlook for the office market is positive, we believe that FCOT will continue to grow organically.
4Q results are in line, with 4Q DPU at 26% of our full-year forecast and FY13 DPU at 99% of our forecast. We trim our FY14 DPU by 3% to reflect slightly slower growth while nudging FY15 up by 1%. We maintain our Outperform rating and DDM-based (discount rate: 8.4%) target price of S$1.45. The expected catalysts are organic positive rental reversion and full-year cost savings resulting from the redemption of CPPUs.
4QFY13 DPU rose 18.8% yoy to 2.08 S¢. The respectable results were mainly attributed to the higher income from the additional 50% interest in Caroline Chisholm Centre, higher rental rates, lower interest costs and most importantly, the redemption and conversion of 330.3m Series A convertible perpetual preferred units (CPPU) in FY13. Qoq, higher occupancy and rental rates achieved during the quarter were offset by the weaker Australian dollar. As a result, both NPI and DPU fell by 4.7% this quarter.
Organic growth expected
Management expects the REIT to grow organically given the 11-20% rental reversions for most of the recently signed leases. However, this growth might be limited as only 8.5% of total leases are due to expire in FY14. The main growth is expected to come when Alexandra Technopark’s masterlease expires in August 2014. Currently, the rental rates renewed/signed in this property range between S$3.5 and S$4.0 – double the rental rate the master lease is paying FCOT.
With a positive outlook in the office market and a possible expansion of FCOT’s books as a result of the 16,000 sq m hotel site at China Square Central, we continue to favour this stock. We maintain our Outperform rating and S$1.45 target price.