FRASERS COMMERCIAL TRUST
ND8U.SI
Frasers Commercial Trust - Potential headwinds largely priced in
- Base case of partial exit of HP as a tenant from Alexandra Technopark largely priced in
- AEI opportunity at Alexandra Technopark to help close 10-30% rental discount to surrounding properties
- Raise TP to S$1.49 from S$1.47 following uplift at AEI at Alexandra Technopark
Negatives priced in.
- We maintain our BUY call with a revised TP of S$1.49.
- FCOT has de-rated over past year due to fears over a downturn in the Singapore office market and concerns over HP Inc and HP Enterprise leaving (c.17% of group GRI) Alexandra Technopark in Sep/Nov-2017.
- However, we believe these risks have been overblown given
- relative stability of Grade B office and business park rents, and
- the potential cut in FY18F DPU (assuming our base case of HP Enterprise moving out) will still result in FCOT offering an attractive yield of around 7% from the current 7.5% yield, which is in line with FCOT’s historical mean yield since 2010.
Potential loss of HP as a tenant a blessing in disguise.
- Based on our analysis of HP Inc and HP Enterprises’ property footprint in Singapore, we anticipate that HP Enterprise will leave Alexandra Technopark. However, we think this is a blessing in disguise as it offers FCOT an opportunity to undertake an AEI to increase rents and the value of the property in the medium term.
- Downside risk to FY18F DPU is also mitigated by the ability to increase the proportion of management fees paid in units from around one third currently to 100%.
Steady near-term earnings underpinned by inbuilt organic growth.
- While we expect a slight dip in DPU in FY18 due the loss of HP Enterprise as a tenant, FCOT’s still offers attractive and steady yields over the next couple of years.
- The resilience in the face of slowing office market is underpinned by WALE of 3.9 years and c.50% of leases having annual rental escalations of above 3%.
Valuation:
- After incorporating the potential loss of HP Enterprise as a tenant in FY18 and S$25m AEI which will raise average rents by c.10%, we raise our DCF-based TP to S$1.49.
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 to mitigate such risks.
Mervin Song CFA
DBS Vickers
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Derek Tan
DBS Vickers
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http://www.dbsvickers.com/
2016-07-12
DBS Vickers
SGX Stock
Analyst Report
1.49
Up
1.47
