Frasers Commercial Trust - RHB Invest 2016-07-25: 2QFY16 Results Flash Note

FRASERS COMMERCIAL TRUST ND8U.SI

Frasers Commercial Trust - 2QFY16 Results Flash Note (FCOT SP)

Frasers Commercial Trust (FCOT) 3Q/9MFY16 DPU both increased 3% YoY to 2.41 cts and 7.37 cts, meeting 74%of our full year forecasts.
Key drivers to improved performance were higher contribution from Alexandra Technopark (NPI +12% YoY) and contributions from 357 Collins Street which was acquired on 18 Aug 2015.

FCOT also distributed additional capital of SGD3.0m for the quarter arising from the disposal of hotel development rights in China Square Central and return of capital from an Australian subsidiary.
Singapore property rental reversion remained positive with higher reversions at China Square Central (+5.5%), 55 Market Street (+10.3%) and Alexandra Technopark (+8.4%). In Australia, the newly acquired 357 Collins Street, Melbourne exceeded its NPI forecast by 12% due to higher occupancies.

Overall portfolio occupancy remained healthy at 93.2% with a WALE of 3.1 years despite lower occupancy at China Square Central due to redevelopments.
Management expects the outlook for the Singapore office market to remain challenging. The outlook for business park space however remains promising with limited supply in the pipeline. The overall impact on FCOT portfolio is mitigated by minimal lease expiry of 1.5% for the rest of the year.
While there is a risk of potential non-renewal of leases by HP (post expiry in 3Q17) due to a potential consolidation of its services in its new Built To Suit facility (17% of Gross Income). We believe below market rentals paid by HP provide some buffer in find new tenants or renewal of existing leases. Management is also proactively engaging in renogiating its leases.
In Australia, premium office market in Melbourne is expected to perform well with Knight Frank expecting a 5.0% p.a rental growth over next 3 years while Perth market is seeing some signs of stabilisation.
Gearing remains stable at 36.3% with a weighted average term to maturity of 2.6years.

We make no change to our BUY rating, forecast and DDM-derived TP (CoE: 7.7%, Tg: 1.2%) of SGD1.40, FY16/17 dividend yield of 7.4%.
Though we are pessimistic on the office leasing climate over the next two years, we are not overly concerned for the REIT. This is because the incoming office supply is mainly within the Grade A office spaces.
In addition, performances for Grade B offices are known to more resilient vis-à-vis Grade A ones. Secondly, FCOT forward yields are at 50-100bp above the Singapore office REITs providing room for compression. Maintain BUY with a TP of SGD1.40.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2016-07-25

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.40 Same 1.40