Frasers Commercial Trust - CIMB Research 2017-04-23: Capital Top-Ups To Buffer Operational Weakness

FRASERS COMMERCIAL TRUST ND8U.SI

Frasers Commercial Trust - Capital top-ups to buffer operational weakness

We came away from the post-results briefing viewing that FCOT could use capital top-ups and/or other alternatives to sustain distributions.
1HFY17 DPU of 5.02 Scts (+1% yoy) was ahead of consensus and our expectations, at 53% of our full-year forecast. 2QFY17 DPU was at 27%.
Portfolio occupancy was lower at 91.8%. 3.6% average rental reversion was achieved.

No new material updates for the Hewlett-Packard (HP) lease or AEI for ATP.
We keep our Hold call with a higher DDM-based TP (S$1.35). Upside/downside risks hinge on outcome of ATP.

2QFY17 NPI improved 9.5% yoy (on cash basis) to S$30.6m due to better results by the Australian portfolio, stronger Aussie dollar (c.50% of A$-income is hedged on 6-month rolling) and an one-off pre-termination payment.
The positives were partially offset by lower occupancies at China Square Central (CSC) and Alexandra Technopark (ATP).
DPU increased 2.4% yoy to 2.51 Scts, with no management fees paid in units in the quarter (40% of manager’s fees in 2QFY16 were taken in units).

2Q distributable income included S$0.9m (0.23 Scts/unit) of capital top-ups from the disposal of hotel development rights at CSC. Recall that FCOT sold the development rights for S$44.8m in Aug 15. Of which, it had paid out S$2.2m in FY16 and S$1.7m in 1HFY17, which leaves c.S$40.9m available for top-ups.
Furthermore, the manager could elect to take fees in units, while the distributable reinvestment programme could help to conserve cash. Hence, we believe that distributions can be sustained.

Singapore occupancy fell to 89% (vs. 92.3% in 1Q) due to lower occupancy at CSC and ATP. Committed occupancy for Australia was 95.3%, thanks to Caroline Chisholm Centre and 357 Collins St being fully occupied.
Led by ATP, average rental reversion of +3.6% was achieved on 119k sq ft of space that was renewed/signed in the quarter (c.4% of portfolio).

2HFY17 The bulk of expiries stem from CSC and ATP, including 5.4% for the Hewlett-Packard (HP) lease at ATP (expires Sep 17). c.12.3% of GRI expiring in FY18 also relates to HP, which occupies c.50% of ATP. Hitherto, HP has not indicated whether it would renew the leases. Our numbers have factored in a HP consolidation.
As signing rents for ATP and CSC are around expiring rents, we could hear of negative rental reversion.

There were no new material updates on the AEI for ATP (i.e. ROI target), though it is envisioned that the AEI would make ATP more competitive, and would allow it to seek closer rents to those achieved by the neighbouring Mapletree Business City.

In Mar 17, FCOT refinanced S$100m and S$50m of term loans due in Sep 17 and FY19 respectively. As a result, debt tenure has lengthened to 2.5 years (vs. 2.3 years at end- 16). Average borrowing costs ticked up marginally 3bp qoq to 3.01%.

We view that FCOT has sufficient surplus cash to buffer for a HP consolidation and lower income from CSC. Hence, we raise our FY17-19 DPU by 3-6.5%, essentially saying that DPUs can be sustained.
Also, Perth’s office market is in better shape.
Our Hold call is maintained as total returns < 10%.
We raise our DDM-based TP on the back of DPU upgrades and a sector-wide decrease in Singapore discount rate.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-04-23

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.35 Up 1.260