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FCOT: Turning around.

Friday, October 22, 2010

On 24 Sep, we observed some large volume buy ups, pushing the unit price of FCOT to 15.5c. I asked "Could it go higher in price?" and said, "From a technical perspective, it does look promising.  Volume is, after all, the fuel that drives rallies and today's volume was impressive."

FCOT released its full year results today and they are encouraging, which possibly explained the recent strength of its unit price. Total distributable income increased 78% year on year. 

The marked improvement in its distributable income has been put down to improving NPI and lower finance costs. The strong A$ also made its contribution.

DPU which is what matters to most unitholders is up 55% at 0.31c for the quarter.  This is after paying CPPU holders their due of 5.5%.  

For the full year, DPU is up 29% at 1.12c.  This is higher than my earlier estimate of 1c on 24 Sep when I said "the 3Q DPU was 0.25c. So, the annualised DPU should be about 1c. Based on today's closing price of 15.5c, the yield is 6.45%."  

So, based on the last closing price of 16.5c, the full year DPU of 1.12c represents a yield of 6.79%. (and based on 15.5c when I last did my analysis, the yield is 7.2%).

FCOT would be paying 0.5549c per unit on 29 Nov 10. FCOT's income distribution takes place half yearly.

Have things turned around for FCOT? Is it now a good investment at the current price of 16.5c? Let us look at some numbers:

1. Gearing level is now at 39.6%, lower than the 40.4% a quarter ago.  This is probably because its property portfolio saw an increase of 1.9% in valuation.

2.  NAV per unit is now at 27c due to the positive revaluation of its properties.  If all the CPPUs were converted, NAV would decline to 26c.

3. Interest coverage ratio is down at 2.48x compared to 2.74x a quarter ago.  This is a negative.

If we use FCOT's 4Q performance as a gauge as to how well it might do in the new FY, assuming that its 4Q DPU is sustainable, we would have an annualised DPU of 0.31 x 4 = 1.24c.  Based on the last closing price of 16.5c, that would give a yield of 7.5%.  This is an improvement.

Assuming that all the CPPUs are converted, it would provide FCOT with funds to the tune of $81m.  This is equivalent to about 10% of FCOT's gross borrowing.  This could bring gearing down to 36%.  Assuming that positive asset revaluation continues, gearing level could come down more in time.

However, if all the CPPUs are converted, we should also expect the total number of FCOT units in issue to increase by about 11%. This could water down the DPU of FCOT but it should not have a significant impact since FCOT would also be saving on distributions to CPPU holders at the rate of 5.5% in such a situation.

So, my answer? 

FCOT has probably turned the corner and the numbers speak for themselves. However, would I buy at the current price level? The encouraging numbers could give FCOT's unit price a lift upwards but it is obvious to any chartist that 17c is the immediate resistance. 

17c is the top of a base formation and a thrice tested resistance level in mid-January this year. However, if 17c resistance is taken out, we would have an eventual target of 20.5c.


From the looks of it, volume seems to be reducing since hitting a high on 24 Sep. In subsequent up days, volume had been lower. So, it could turn out to be a case of "sell on news". 

Immediate support is at 16c but I see a stronger support to be provided by the 50dMA which coincides with an uptrend line.  That might be a better entry price.  I do not like to chase.

See presentation slides here.

Related post:
FCOT, CCT and K-REIT.

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