Frasers Commercial Trust - CIMB Research 2018-01-23: Focus On Upcoming Leasing Activities

Frasers Commercial Trust - CIMB Research 2018-01-23: Focus On Upcoming Leasing Activities FRASERS COMMERCIAL TRUST ND8U.SI

Frasers Commercial Trust - Focus On Upcoming Leasing Activities

  • Frasers Commercial Trust (FCOT)'s 1QFY9/18 DPU within expectations, accounting for 25.1% of our FY18 forecast.
  • Portfolio occupancy held steady in 1Q at 86.6%.
  • More income volatility from Alexandra Technopark (ATP) and China Square Central (CSC) AEI.
  • Maintain HOLD, with DDM-based Target Price raised to S$1.55, including the new acquisition.

1QFY9/18 results highlights 

  • Frasers Commercial Trust (FCOT) recorded an 11%/15% y-o-y decline in 1QFY9/18 gross revenue and NPI, respectively, to S$35.3m/S$24.9m, due to lower occupancy at Alexandra Technopark (ATP), China Square Central (CSC) and Central Park in Perth and a weaker A$ compared to a year ago. 
  • However, distribution income slipped 2% y-o-y to S$19.5m while DPU retraced 4% y-o-y to 2.4 Scts with 100% of management fees paid in units.

Portfolio occupancy held steady in 1Q 

  • Average committed portfolio occupancy rate remained largely stable at 86.6% in 1Q (vs. 85.9% in 4Q17) while average passing rents were unchanged q-o-q, as HP Singapore extended part of its lease for another 2-13 months from 1 Dec 2017. 
  • During the quarter, there was demand from the medical/pharmaceutical, IT, insurance and electronics sectors. 
  • Overall, Frasers Commercial Trust (FCOT) has another 24.3% of gross rental income (vs. 33.8% in 4Q17) to be renewed for the remainder of FY18, with another 19.4% expiring in FY19.

More income volatility at ATP 

  • We anticipate continued income pressure at Alexandra Technopark (ATP) in the near term as 173,710 sqft of HP Singapore’s lease is expected to expire between 2Q and 4QFY18. This makes up c.16.7% of ATP’s NLA. A further 93,195 sqft of lease is due to expire in 1QFY19.
  • Meanwhile, a S$45m asset enhancement initiative is underway to rejuvenate the property and should enhance the rental competitiveness of this property when completed.

CSC AEI commencing in 1Q18 

  • China Square Central (CSC) is currently undergoing a S$38m enhancement programme to reposition the retail podium to focus on F&B, wellness and services. 
  • Construction works are expected to commence in 1Q18 and the retail NLA is expected to be increased to c.75,000 sqft when completed, likely by mid-2019. 
  • WeWork has committed to take up c.28,700 sqft of office space at CSC, in phases starting from 2H18.

First foray into the UK, acquires 50% of Farnborough Business Park

  • Frasers Commercial Trust (FCOT) has expanded its investment mandate to Europe, with an initial focus in the UK, and has a right of first refusal of over S$4bn of its sponsor’s assets for future acquisition.
  • As a start, FCOT has acquired a 50% interest in Farnborough Business Park in the UK, for £87.5m. The deal is expected to be completed by end-Jan 18.

Healthy balance sheet 

  • Frasers Commercial Trust (FCOT)’s gearing stands at 34.8% as at 1QFY18, with average debt maturity of 2.3 years.
  • 81% of its gross borrowings are on fixed rates. Assuming the UK acquisition is funded totally by debt, gearing could rise to 39.2%.

Maintain HOLD 

  • We adjust our FY18-20 DPU estimates to include the new contributions from the UK acquisition and tweak our blended cost of equity from 8.4% to 8.3%. As such, our DDM-based Target Price is raised to S$1.55. 
  • Frasers Commercial Trust (FCOT) is trading at 6.3% FY18 DPU yield and offers c.6% total return. Maintain HOLD. 
  • Upside risk could come from faster-than-expected leasing activities at ATP, while downside risk could come from longer-than-expected vacancy at the property.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | 2018-01-23
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.55 Up 1.460