Frasers Commercial Trust - DBS Research 2016-10-21: Discounted office play

Frasers Commercial Trust - DBS Research 2016-10-21: Discounted office play FRASERS COMMERCIAL TRUST ND8U.SI

Frasers Commercial Trust - Discounted office play

  • 4Q16 DPU of 2.45 Scts (-3% y-o-y) in line with expectations.
  • Payment of management fees in cash gives financial flexibility in the medium term.
  • Despite fears over state of Singapore office market, positive rental reversions achieved.



Negatives priced in. 

  • We maintain our BUY call with TP of S$1.49. 
  • Frasers Commercial Trust (FCOT) has de-rated over the past year due to fears of a downturn in the Singapore office market and concerns over HP Inc and HP Enterprise leaving (c.17% of group gross rental income) Alexandra Technopark in September/November 2017. However, we believe these risks have been overblown given 
    1. relative stability of Grade B office and business park rents, and 
    2. ability to maintain its current DPU through the increased use of management fees paid in units and/or payment of capital gains from the sale of hotel development site at China Square Central.


Potential loss of HP as a tenant a blessing in disguise. 

  • Based on our analysis of HP Inc and HP Enterprises’ property footprint in Singapore, we anticipate that HP Enterprise will leave Alexandra Technopark. However, we think this is a blessing in disguise as it offers FCOT an opportunity to undertake an AEI to increase rents and the value of the property in the medium term.
  • Downside risk to FY18F DPU is also mitigated by the ability to increase the proportion of management fees paid in units from zero currently to 100%.


Spread to other office REITs too wide. 

  • FCOT currently trades on a 7% yield compared to the 5.8% average for large-cap office REITs such as CCT and KREIT. 
  • We believe the 1.2% yield differential, which is higher than the historical average spread of 0.8%, is unwarranted given FCOT’s ability to maintain its current DPU.

Valuation

  • We maintain our DCF-based TP of S$1.49. 
  • Our valuation incorporates the potential loss of HP Enterprise as a tenant in FY18 and a S$25m AEI which will raise average rents by c.10%.

Key Risks to Our View

  • Unfavourable forex movements. As FCOT derives c.45% of its NPI in AUD while distributions are based in SGD, foreign currency fluctuations will have an impact on distributions. The Manager has hedged its AUD exposure on a rolling basis of 6-9 months to mitigate such risks.




Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-10-21
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.49 Same 1.490



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