Fortune Real Estate Investment Trust

OCBC on 23 Jul 2012

FRT achieved a record-breaking 1H12, with revenue and net property income climbing by 20.3% and 19.6% YoY to historic highs of HK$537.4m and HK$382.1m respectively. 1H12 DPU rose by 23.6% YoY, the highest growth in FRT's nine-year operating history, to 15.82 HK cents, slightly better than our expectations. The strong results are attributable to FRT's three-pronged growth strategy: active lease management, yield-accretive acquisitions of Provident Square and Belvedere Square in mid-Feb and good returns on AEIs of Fortune City One and Ma On Shan Plaza. We maintain our BUY rating and raise our fair value from HK$5.22 to HK$5.33.

Impressive growth and strong financial position
FRT achieved a record-breaking 1H12, with revenue and net property income climbing by 20.3% and 19.6% YoY to historic highs of HK$537.4m and HK$382.1m respectively. 1H12 DPU rose by 23.6% YoY, the highest growth in FRT's nine-year operating history, to 15.82 HK cents, slightly better than our expectations. As of 30 Jun, FRT's gearing is healthy at 24.5%. The weighted average effective cost of borrowing was brought down to 2.77% for 1H12 versus 4.44% for 1H11.

Good rental reversion and occupancy
FRT's private housing estate shopping mall portfolio saw rental reversion of 20.6% for the enlarged portfolio, with passing rent for the original portfolio rising 11.5% YoY. Portfolio occupancy was healthy at 96.5% as at 30 June 2012. There are vacancies due to ongoing AEIs at Fortune City One (FCO) and Jubilee Square.

Ongoing AEIs to deliver returns
Over 70% of the planned AEI at FCO is completed and the remaining works are to be completed by end 2012. The capex is expected to total HK$100m and target ROI is 15%. FRT has started AEI at Jubilee Square in 2Q12 to capitalise on the growth in the immediate catchment. Capex is estimated to be HK$15m with a target ROI of 15%. The expected completion is in 1H13.

Newly acquired malls are improving
Since Feb, a few retail shops and a F&B outlet have been introduced at Belvedere Square. With over 30% of its leased area expiring in the rest of 2012, the management seeks to broaden the tenant and trade mix. Provident Square's occupancy has been significantly boosted to 99.6% as of 30 Jun, versus 92.3% in Sep 2011.

Maintain BUY
Fortune is trading at a P/B of 0.6x (NAV per unit of HK$8.34) and an estimated FY12 dividend yield of 6.5%. We maintain our BUY rating and raise our fair value from HK$5.22 to HK$5.33.