RHB Research 2015-07-21: Frasers Commercial Trust - Robust Positive Rental Reversion. Maintain BUY.

Robust Positive Rental Reversion

  • FCOT’s 3QFY15 (Sep) DPU grew 7.3% YoY to SGD2.38 cents, mainly driven by a robust performance from its Singapore assets, offset by the weakening AUD. 
  • Maintain BUY, with a SGD1.71 TP (10% upside). 
  • Its Singapore portfolio continued to book better-than-expected rental reversion ranging 14-20% for 3Q. 
  • We expect the positive rental reversion to continue, due to the low-base passing rents in previous years. 

 DPU weakened by depreciating AUD, offset by strong performances by Singapore assets. 

  • Frasers Commercial Trust’s (FCOT) DPU grew - 1.3%/7.3% QoQ/YoY in 3QFY15/9MFY15 respectively. 
  • The 9MFY15 DPU made up 71% of our full-year estimate. 
  • The QoQ decline in DPU was mainly due to the weakening of AUD against SGD, even though the REIT’s distributable income was fully hedged. 
  • The REIT’s average portfolio occupancy rate remained high, at 96.5%, while its gearing ratio remained healthy at 37.2%, with 78% of its borrowings classified as fixed. 

 Double-digit rental reversion locked in for Singapore assets. 

  • The REIT’s Singapore assets locked in double-digit rental reversion for both its new and renewed leases in the quarter, ranging from 14% to 20%. 
  • For FY16, we maintain our expectation for high positive rental reversion for China Square Central (CSC) and Alexandra Technopark (ATP), with 7% and 10% of the respective properties’ gross rental income up for renewal in that period. 

 CSC Hotel development and 357 Collins St acquisition are in their respective final stages of completion. 

  • Management estimates that the CSC transaction will be completed before 1 Oct, while the acquisition of 357 Collins St is expected to be completed before 1 Sep. 

 BUY. 

  • We recently re-initiated coverage on FCOT as we find its resilience unbeatable, especially in this volatile equity market. FCOT is uniquely positioned as the only office SREIT not exposed to the oversupply of Grade A office space. 
  • In addition, we expect it to continue to record positive rental reversion, mainly due to: 
    1. the low base of average passing rent in the previous years, and 
    2. the narrowing of the rental spread between Grade A and B office spaces. 
  • We reiterate our BUY recommendation, with a TP of SGD1.71. 

(Ivan Looi, Ong Kian Lin)

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