Frasers Commercial Trust - DBS Research 2016-01-06: Consolidating Its Position

Frasers Commercial Trust - DBS Research 2016-01-06: Consolidating Its Position FRASERS COMMERCIAL TRUST ND8U.SI 

Frasers Commercial Trust - Consolidating Its Position 


Firing on all fronts 

  • We maintain a BUY call, TP S$1.53
  • FCOT offers an attractive yield of of 7.8-7.9%, which is compelling in our view, given limited downside risks in the immediate term. 
  • We believe that its portfolio of mainly Grade B office assets, business parks will weather the current downturn in CBD rents over FY16-17F. 

FY16F is a year of gestation. 

  • After a strong rebound in DPU of 15% in FY15, driven partly by 
    1.  expiring of under-rented master lease at Alexandra Technopark which offered significant upside to revenues and 
    2.  acquisition of 257 Collins Street in Melbourne. 
  • Looking ahead, we believe that FY16F will be a year of gestation for the REIT as the manager looks to consolidate its position and look to optimize portfolio performance given increasing headwinds in the Singapore office market and slowing Australian economy. 

Secure earnings with steady growth. 

  • FCOT’s portfolio enjoys a high occupancy of 96.5% and a long WALE of 3.9 years. 
  • In addition, > 30% of leases have annual rental escalations of c.3%, which provides in-built income growth. 
  • With no debt expiring until FY17, and close to 80% of interest costs hedged into fixed rates, the Trust is well positioned to ride out the economic downturn in Australia, as well as near term interest rate volatility. 


Valuation: 

  • We maintain our BUY call and DC-based TP S$1.53. 
  • At its current price, FCOT offers investors a dividend yield of c.7.8- 7.9% over FY15-16F, which is highest amongst office-focused S-REITs. 


Key Risks to Our View: 


Unfavourable forex movements. 

  • As FCOT derives c.45% of its NPI 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, and given the negative movement of AUD, we have factored in lower exchange rate assumptions in our forecasts.



Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2016-01-06
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.53 Same 1.53


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