Frasers Commercial Trust - Revamping Alexandra Technopark to boost long-term growth
- We reiterate our NEUTRAL rating on FCOT as well maintain our earnings/dividend forecast and DDM-derived TP of SGD1.40 (CoE: 7.7%, Tg: 1.2%).
- The stock offers FY17F dividend yield of 7.6%.
- Frasers Commercial Trust (FCOT) posted unchanged 1QFY17 DPU of 2.51 cents, meeting 26% of our FY17 forecast.
- Gross revenue remained flat at SGD39.7m, while DPU was up 1.2% YoY, due to a capital distribution of SGD2.2m.
- Singapore portfolio accounted for 54% on its net property income (NPI), with Australian properties accounting for the rest. Income from Australian properties are fully hedged on a forward 9-month rolling basis.
- Management fees for the quarter were fully paid in cash as compared to 23% in units during similar period last year.
- Average portfolio occupancy remained steady at 93% with weighted average lease expiry (WALE) increasing to 3.8years (FY16: 3.0 years).
- Gearing remained steady at 36% with weighted average borrowing cost of 2.98%. About 85% of its debt is fixed.
- As we had anticipated, FCOT is embarking on SGD45m asset enhancement initiative (AEI) plans at Alexandra Technopark (ATP) to reposition the asset amidst increased competition. The move is positive and timely as we do not expect its key tenant Hewlett Packard (HP) to extend when the leases expires in Sep/Nov 2017. With current rents at ATP ranging about SGD4.00-4.50psf, which is well below Grade B office average rent of SGD6.95psf, we expect AEI to result in high ROI of 10- 15%. The AEI is expected to commence in mid-2017 and would to be completed in one year.
- In 1QFY17, FCOT completed five new/renewed leases achieving an average rental reversion of +5.9%. The positive reversions came mainly from ATP. About 15.3%/29.4% of its portfolio (as % of rental income) is due for renewals in FY17/18 and we expect some negative rent reversions due to challenging office market environment.
- Construction works for the development of a Hotel and Commercial Project at China Square Central are on track and is expected to be completed by mid-2019. The upcoming hotel will be operated under the “Capri by Fraser” brand. The hotel, along with the retail redevelopment should rejuvenate China Square Central area.
- We are positive on rejuvenation of ATP, but the potential loss of income during the transition period and macro headwinds in the office sector will likely cap the REITs near-term share price performance.
- Maintain NEUTRAL with unchanged TP of SGD1.40.