Frasers Commercial Trust - 2QFY17 Results Flash Note ~ Decent results despite challenges.
- We maintain neutral call with unchanged TP of SGD1.40 based on our DDM methodology (CoE: 7.7%, Tg: 1.2%).
- FCOT currently offers FY17F yield of 7.3%.
- Frasers Commercial Trust (FCOT) DPU increased 2.4% YoY boosted by better performance from Australian properties, one-off payments from lease termination in Central Park and stronger AUD. Results were in-line accounting for 26% of our FY17 forecast.
- 2QFY17 DPU also included a capital distribution of SGD1.8m or 0.23 cents. The capital distribution were mainly from the disposal of the hotel development rights in respect of China Square Central and earnings from Australia properties which were trapped due to non-cash accounting items. Management fees were fully paid in cash (2QFY16: 40% in units).
- Despite challenging market conditions, FCOT managed to achieve positive average rent reversions of +3.6% for ~119,100 sq ft of new/renewed leases signed during the quarter. About 13.8%/29.7% (as % of gross rents) are due for renewal in FY17/18 respectively.
- Overall Portfolio Occupancy dipped to 91.8% (1QFY17: 93.0%) with a WALE of 3.7 years. The increased vacancy was mainly due to planned vacancies at China Square Central owing to on-going construction works.
- Gearing stands at 35.9% with 91% of borrowings on fixed rate. NAV/unit stands at SGD1.54.
- Key concern remains expiries of Hewlett-Packard Singapore (HPS) and Hewlett-Packard Enterprise (HPE) leases in Alexandra Technopark (ATP). In Sep 2017, HPE leases which account for about 5.4% of gross rental income will be expiring followed by another 12.3% in Nov 2017 (1.5% of HPE, 10.8% of HPS). With HP consolidating its operations in its build-to-suit facility in Depot Road we believe the leases are unlikely to be renewed. While estimated rentals currently paid by HP (at high SGD 3psf) are still slightly below market rents back filling the entire office space in short span remains a challenge.
- FCOT is currently embarking on asset enhancement works at ATP with estimated capex of SGD45m. The AEIs will create more community-friendly spaces, increase connectivity and integration and a refreshed and contemporary look with minimal disruption to the tenants. Preliminary AEI works have commenced and will be completed around mid-2018. We are positive on the move as it helps to better position the ageing asset amid increased competition in the locality.
- AEI works in China Square Central are also on-track to be completed by mid-2019.
- Looking ahead, Australian assets are expected to contribute positively with demand picking up and AUD strengthening.
- Overall, we maintain our neutral recommendation mainly owing to the uncertainties surrounding HP leases. Valuation remains attractive with stock trading at 0.9x P/BV and offering yields of 7.3% which provides downside protection.