Frasers Centrepoint Trust (FCT) announced its 1Q09 quarterly results (on 23 January), with distribution per unit (DPU) 2.7% above our forecast, but net- property income (NPI) 11.2% below forecast.

The NPI shortfall came from asset-enhancement activity disruption at Northpoint (occupancy of 52% at the end of December). The manager expects the asset enhancement to be completed by June 2009. We have lowered our full- year occupancy forecast for Northpoint to 85% from 93% previously.

The positive DPU variance came from lower-than-expected borrowing costs (3.3% p.a. for the quarter) and a 100% payout of distributable income versus our forecast of 90%.

We have revised down our DPU forecast by 2.1% for FY09 after having lowered our NPI forecast by 4.4%, from the Northpoint downtime and lower rental renewals, offset partially by lower borrowing costs. Our DPU forecast changes in subsequent years are even more negligible.Valuation

We have lowered our six-month target price, based on our RNG valuation method, to S$1.03 from S$1.05 previously, prompted by a slight upward revision to our FY10 core operating distribution forecast. We continue to ascribe a 7% effective cap rate assumption for FCT’s suburban-mall portfolio.Catalysts and action

We maintain our 1 (Buy) rating for FCT, as we believe the quarterly NPI weakness was caused solely by planned asset-enhancement disruption. We expect the occupancy rate to recover at Northpoint along with a strong pick-up in rentals upon completion in June.

We also believe FCT’s income streams are one of the most defensive in the Singapore-listed real-estate investment trust (S-REIT) sector. In addition to the resilience of its assets, FCT’s leverage ratio is only 28.5%, and 80% of its debt matures in July 2011 with its interest fully hedged. Hence, we believe the overall low-risk nature of FCT’s will be a source of outperformance, especially if the economy and property sector get hit hard.