Frasers Commercial Trust - OCBC Investment 2017-09-04: Positive Indications In Australia And Singapore

Frasers Commercial Trust - OCBC Investment 2017-09-04: Positive Indications In Australia And Singapore FRASERS COMMERCIAL TRUST ND8U.SI

Frasers Commercial Trust - Positive Indications In Australia And Singapore

  • Good outlook for Australian market.
  • HP’s space requirements well supported.
  • Maintain HOLD.

Sunny prospects Down Under 

  • According to Colliers International, Melbourne’s CBD office vacancy rate in July 2017 was at 6.5%, a notable improvement from the 7.1% registered in July 2016. With an immediate supply shortage in the CBD leading up to the next cycle in 2018-2019, coupled with the prevailing high demand, vacancy rates are expected to fall below 4.5% in 2H19.
  • Consequently, downward pressure on incentives will be likely, thereby improving effective rents over 2018. In Perth, the CBD office market appears to be bottoming. An improvement in net absorption has been observed, with most of the absorption stemming from the premium space, due to increased average incentives of 3.25 ppts YoY to 48.25% in June 2017. A ‘flight to centrality’ trend has also seen a significant portion of absorption arising from tenants migrating from suburban/fringe locations.
  • Frasers Commercial Trust (FCOT), with office assets in both cities, should benefit from these tailwinds.

HP’s consolidation of space locally (if any) is unlikely to be drastic 

  • HP. Inc.’s 3QFY17 net revenue grew 9.8% YoY to US$13.1b, with Asia-Pacific revenue growing 15% YoY. HP Inc. has also launched their 3D printing business in Asia-Pacific, expanding into countries like South Korea and Singapore. This follows a previous announcement regarding the commercial availability of the HP Jet Fusion 3D Printing Solution and expansion of the HP Partner First 3D Printing Specialization programme for Asia-Pacific countries. In particular, HP and its partners will also be unveiling new 3D Printing Reference and Experience Centers across AsiaPacific, including Singapore. 
  • In our opinion, these developments indicate that HP Inc. should still possess a healthy appetite for local real estate. 
  • While rationalisation of space is possible, we deem it unlikely that HP will relocate their existing operations spanning ~2.1m sqft across Singapore entirely to the new build-to-suit project at Telok Blangah, which has a total GFA of 824.5k sqft.

Uncertainties about lease expiries persist 

  • Notwithstanding the above, we believe that the uncertainty of HP’s lease expiries at Alexandra Technopark will continue to weigh on FCOT’s share price performance
  • We maintain our HOLD rating with an unchanged fair value of S$1.42.
  • FCOT is trading at a FY18F distribution yield of 7.0%.

Joseph Ng OCBC Investment | 2017-09-04
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 1.420 Same 1.420