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Frasers Commercial Trust - DBS Research 2016-07-12: Potential headwinds largely priced in

Frasers Commercial Trust - DBS Research 2016-07-12: Potential headwinds largely priced in 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 
    1. relative stability of Grade B office and business park rents, and 
    2. 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 | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-07-12
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.49 Up 1.47


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