Frasers Commercial Trust - DBS Research 2016-04-21: On a defensive mode

FRASERS COMMERCIAL TRUST ND8U.SI

Frasers Commercial Trust - On a defensive mode

2Q16 DPU improved due to contribution from contribution from 357 Collins St, in line with our forecast.
Only 6.4% of gross rental income will be due in 2H16, thanks to proactive lease management.
FY17 will be a crucial year as 22% of top line will expire expire.

Revised TP down to S$1.47 as a result of lower earnings forecasts for Alexandra Technopark and Central Park.

We maintain our BUY call, TP revised to S$1.47.
FCOT offers an attractive yield of > 7.6%, which is compelling given limited downside risks, in our view.
We believe that its portfolio of mainly Grade B office assets and business parks has proven itself and will weather the current downturn in CBD rents over FY16-17.
Major leases are expiring in FY17-18F, a hurdle that the manager is proactively managing tenancy risk.
Due to the Manager’s proactive management, leases due in FY16 have been reduced from 15.4% in 1QFY16 to 6.4% in 2QFY16.
Nonetheless, 22.3% of the top line will be due in FY17, out of which 10% is from top ten tenants. Of note are major tenants like BHP (Central Park), Microsoft Operations (Alexandra Technopark), Cerebos Pacific (China Square Central).
The major lease expiry in FY18 is HP (Alexandra Technopark) while still an uncertainty at this point, could be an opportunity for the manager to work on an AEI to improve building specifications.

FCOT’s portfolio enjoys a healthy occupancy of 92.5% and a WALE of 3.9 years. In addition, c.50% of leases have annual rental escalations above 3%, which provides built-in income growth.
With no debt expiring until FY17, and over 80% of interest costs hedged into fixed rates, FCOT is well positioned to ride out the economic downturn in Australia, as well as near-term interest rate volatility.

We maintain our BUY call but adjusted earnings from selected properties down and revised down our DCF-based TP to S$1.47.
At its current price, FCOT offers investors an attractive dividend yield of c.7.7% over FY16-17.

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 to mitigate such a risk.

Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2016-04-21

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.47 Up 1.53