RHB Research 2015-07-16: Frasers Commercial Trusts - Most Defensive Office REIT. Upgrade to BUY.

Most Defensive Office REIT

  • We reinitiate coverage on FCOT with BUY
  • Our DDM-based TP of SGD1.71 (11% upside, CoE: 7.2%), implies a total return of 18.1%. 
  • The REIT is a gem among the office REITs, being the most exposed to the resilient office subsector. 
  • In addition, FCOT also offers one of the highest FY16F yields (6.8%), which is above the 6.2% industry average. 
  • A growth catalyst would be higher-than-expected rental reversions, with more acquisitions in the pipeline. 

 Unveiling the most resilient office SREITs. 

  • Frasers Commercial Trust (FCOT) is unique among its peers, being exposed to defensive subsectors such as Grade B office and high-specification (hi-spec) industrial spaces. The latter house technology giants such as HewlettPackard (HPQ US, NR) and Microsoft (MSFT US, NR). 
  • These subsectors have a great track record of stability in both rental rates and occupancy levels. 

 Highest-yielding office SREITs. 

  • Despite being one of the most stable office REITs, FCOT offers a FY16F yield of 6.8%, which is well above the average (among Singapore-centric office REITs) of 6.2%. 

 Short term catalyst: organic growth via higher-than-expected rental reversion. 

  • The REIT is poised to benefit from positive rental reversion as: 
    1. Grade B office spaces profit from the narrowing of the rental yield spread between Grade A and B offices, and 
    2. low passing rent was booked for leases expiring in FY15 and FY16. 

 Long term catalyst: rejuvenation of China Square Central. 

  • The central idea behind the redevelopment is to boost footfall count in China Square Central. 
  • Retail frontage would be more visible while the upcoming hotel, which was sold to its sponsor, ought to complement China Square Central in boosting traffic flow. 
  • We believe this could translate to higher rental rate increases for tenants. 

 Re-initiate coverage with a BUY call and DDM-derived TP of SGD1.71. 

  • We have a BUY recommendation on FCOT, backed by a DDM-derived TP of SGD1.71 (CoE: 7.2%), with FY15F/FY16F dividend yield of 6.7%/6.8%, and implying 1.04x FY15F P/BV. 
  • The key risk to our forecasts would be that of currency fluctuation.

(Ivan Looi, Ong Kian Lin)

Source: http://www.rhbgroup.com/