Frasers Commercial Trust - CIMB Research 2017-10-20: Still Focusing On Upcoming Expiries

Frasers Commercial Trust - CIMB Research 2017-10-20: Still Focusing On Upcoming Expiries FRASERS COMMERCIAL TRUST ND8U.SI

Frasers Commercial Trust - Still Focusing On Upcoming Expiries

  • Frasers Commercial Trust (FCOT)'s FY17 DPU of 9.82 Scts was spot on with our expectation, at 100% of our forecast.
  • Positive portfolio rental reversion during the quarter underpinned by rental escalations in Australia.
  • We project near-term income volatility for Alexandra Technopark (ATP) due to income vacuum from the expiry of Hewlett Packard Enterprise's (HPE) lease.
  • New asset enhancement initiatives (AEI) planned for China Square Central.
  • Maintain Hold with DDM-based TP of S$1.46.

4Q/FY17 results in line with our estimates 

  • Frasers Commercial Trust (FCOT) reported 4QFY17 gross revenue of S$156.6m, -3% yoy as better performance at its Australian portfolio and stronger A$ was offset by lower occupancy at its Singapore assets, and higher expenses at Caroline Chisholm Centre and Central Park. 
  • 4QFY17 DPU was relatively unchanged yoy at 2.41 Scts. 
  • FY17 DPU of 9.82 Scts was flat yoy and included 1.15 Scts of gains from divestment of its hotel development rights at China Square Central. Book NAV rose to S$1.57/unit thanks to a S$60m revaluation surplus.

Enjoyed average 1.9% positive rental reversion in FY17 

  • FCOT leased/renewed 253,900 sqft of space (9.7% of portfolio) in FY17 with positive 1.9% rental reversion. 357 Collins St and Caroline Chisholm Centre benefited from a 3.9% and 3% p.a. contracted rental escalation, respectively. 
  • However Singapore assets continued to experience negative rental reversion, in tandem with industry peers. Average committed occupancy stood at 85.9% at end-FY17 with a weighted average lease to expiry of 3.4 years.

Near-term income volatility for Alexandra Technopark (ATP) 

  • FCOT has 33.8%/15.2% of income expiring in FY18F/FY19F. FY18F expiries include an estimated 347,000 sqft of space (c.12-13% of portfolio income) at Alexandra Technopark (ATP) currently leased by HPE/HP Singapore. HPE had signaled its intention to give up the space and the trust is currently in discussion with HP Singapore on plans for its space. This could be a drag on near-term occupancy levels at ATP. 
  • FCOT is undertaking a S$45m AEI at ATP to create a more contemporary business campus with greater connectivity.

AEI plans for China Square Central (CSC) 

  • FCOT plans to conduct an S$38m AEI at China Square Central (CSC) to increase the asset's retail NLA by 11k sqft (+17%) and to reposition the retail podium to focus on F&B, wellness and services. FCOT expects this exercise to complete around mid-2019, in time for the opening of the new Capri by Fraser hotel there. 
  • While FCOT shared no ROI targets, we believe a larger retail footprint would enable FCOT to expand retail offerings and attract more footfall into the property. We have factored in lower occupancy during the AEI period.

Maintain Hold 

  • We leave our FY18-19F DPU relatively unchanged. Imputed into our DPU estimates are some capital distribution from divestment gains during the asset enhancement period.
  • Our DDM-based Target Price inches up to S$1.46 as we roll forward our assumptions (COE: 8.4%). We keep our Hold call on FCOT due to lack of near-term earnings catalyst.
  • Upside risks include inorganic/acquisition growth while downside risks include a longer-than-forecasted period to increase portfolio occupancy levels.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-10-20
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.46 Up 1.450