Frasers Commercial Trust - DBS Research 2017-05-30: Glass Half Full

Frasers Commercial Trust - DBS Vickers 2017-05-30: Glass Half Full FRASERS COMMERCIAL TRUST ND8U.SI

Frasers Commercial Trust - Glass Half Full


Negatives priced in. 

  • We maintain our BUY call with a TP of S$1.52. 
  • Frasers Commercial Trust (FCOT) has de-rated over the past year due to fears of a downturn in the Singapore office market, and loss of income at Alexandra Technopark (ATP).
  • However, we believe these risks have been overblown given FCOT’s ability to maintain a stable DPU and the fact that FCOT’s current yield differential to the large-cap office REITs such as CapitaLand Commercial Trust (CCT) and Keppel REIT (KREIT) is 1.7%, which is above the historical average spread of 1%.


Where we differ - Potential loss of HP as a tenant a blessing in disguise. 

  • The market has been concerned over the potential loss of HP Inc and HP Enterprise whose leases at ATP expire in September and November 2017 respectively, and combined together contributes c.17.7% of group gross rental income.
  • Compared to consensus, in our view, losing HP will benefit FCOT in the medium term. 
  • Coupled with the refurbishment of ATP, we believe FCOT will be able to secure new tenants on higher rents and at the same time reduce its tenant concentration risk.


Stable DPU. 

  • Based on our analysis of HP Inc’s and HP Enterprises’ property footprint in Singapore, we anticipate that HP Enterprise will leave ATP. However, we believe FCOT can maintain its current DPU through managing the proportion of payment of management fees in units and/or distribution of capital gains from the sale of the hotel development site at China Square Central.


Valuation

  • We maintain our DCF-based TP of S$1.52. 
  • With 11% capital upside and yield in excess of 7%, we maintain our BUY call.


Key Risks to Our View

  • Unfavourable forex movements. As FCOT derives c.45% of its net property income 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.




Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-05-30
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.520 Same 1.520



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