Who says boring is bad? Apart from its resilient suburban portfolio, FCT stands out among the S-REITs as one of the least aggressive in terms of acquisitions. On hindsight, we think management has been among the most effective in terms of preserving the stock’s theoretical valuation through its strong asset enhancement initiatives and cautious acquisition stance. With that, FCT continues to boast commendable financial credit metrics and a strong balance sheet, which does not warrant any dilutive equity capital raising in the foreseeable future.
Resilient portfolio with limited downside. At current prices, FCT offers investors a dividend yield of 7% for FY09 and 7.2% for FY10. Causeway Point and NorthPoint, which contributes to 92% of NPI, are suburban malls which are resilient even during periods of recession. FCT has a strong balance sheet with gearing of 32.7% and interest cover of 4.5x. As all acquisitions are put on the backburner, there is no need for any equity raising in the near-term.
Low beta and high earnings resilience justify lower COE assumption. Like most REITs, FCT has risen sharply (+75%) since Mar 09, providing a forward yield spread of 470bps above riskfree instruments, 110bps above its historical 360bps average. Despite the sharp increase, we think a forward yield of 7.2% continues to underscore our BUY justification on the counter. This is in view that FCT has one of the lowest betas (0.75x) among S-REITs, which typically average 1.1x. The relative stability of the stock price justifies a lower cost-of-equity assumption, hence higher theoretical fair value. Stock still undervalued at current levels. Trade stock to S$1.17 (~6% yield).
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