Frasers Commercial Trust - CIMB Research 2016-07-24: Factoring in possible HP consolidation

FRASERS COMMERCIAL TRUST ND8U.SI

Frasers Commercial Trust - Factoring in possible HP consolidation

9M16 DPU of 7.37 Scts (+2.5% yoy) was in line with our and consensus expectations, at 75% of our FY9/16 forecast. 3Q16 DPU of 2.41 Scts was at 25%.
Singapore occupancy improved to 93.2%. Microsoft extended its current lease at ATP by another five years to FY22.
We conservatively factor in possible HP consolidation, resulting in a 5% cut in our FY18 DPU.

Relatively attractive dividend yields compared to its peers’ underpin our Add call.

Revenue/NPI increased 11%yoy/16% yoy in 3Q16 due to better performance of ATP (higher rentals and lower utilities expenses), contribution from 357 Collins Street and lower Australian repair and maintenance expenses.
In line with NPI growth, distributable income increased 19% yoy in 3Q16. 3Q16 DPU of 2.41 Scts included capital distribution of 0.38Scts, so to compensate for affected units at CSC (ongoing construction works).
The manager will also be applying dividend reinvestment plan (DRP) in 3Q16.

Singapore occupancy improved to 93.2%(1HFY16: 92%) as the trust signed 214k sq ft of new/renewed leases in 3Q16. Accordingly, leases for renewal in FY16 were reduced to a minimal 1.5% (1H16: 6.4%).
Australia occupancy stayed at 93.4% in 3Q16, due mainly to the 80.4% occupancy at Central Park. The recent AEI at the property could help improve occupancy. Meanwhile, 357 Collins Street continues to surpass forecast.

In Singapore, Microsoft extended its lease at Alexandra Technopark (ATP) by five years to FY22 (current lease expires in Jan 2017). Microsoft occupies 7.4% of ATP and the property recorded 8.4% positive rental reversion in the quarter. China Square Central (CSC) and 55 Market Street recorded +5.5% and +10.3% rental reversion, respectively. The office tower of CSC remains fully occupied, while development works are on track.

Hewlett-Packard (HP) is an anchor tenant at ATP, making up c.20% of its income (refer to overleaf for details).
We have conservatively factored in a scenario of HP consolidation and assume frictional vacancies at ATP due to the non-renewal of HP’s lease in 4Q17. This led to a 5% cut in our FY18 DPU.

Even after incorporating the possible bearish case of a HP consolidation, FCOT offers relatively attractive forward yields of 7.0-7.3% (vs. peers’ 6.5%).
We maintain Add on FCOT, with an unchanged DDM-based target price (S$1.42) (cut in risk-free assumptions offset by cut in DPU estimates). We project total return of 12.6% for FY16F.
Potential catalysts include better performances from ATP and Central Park.
Risks could include worse- than-expected occupancy at ATP.

YEO Zhi Bin CIMB Securities | LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-07-24

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.42 Same 1.42