Frasers Commercial Trust - RHB Invest 2018-01-24: Revamp In Progress

Frasers Commercial Trust - RHB Invest 2018-01-24: Revamp In Progress FRASERS COMMERCIAL TRUST ND8U.SI

Frasers Commercial Trust - Revamp In Progress

  • Frasers Commercial Trust (FCOT)'s 1QFY18 results were in line. However, portfolio weakness was visible, with four out of FCOT’s six properties registering lower occupancies. 
  • Its recent foray into the UK’s business park segment is positive and is likely to help diversify its income. The likelihood of a near-term EFR to fund the deal is likely to cap share price performance, though. 
  • Key potential to unlocking shareholder value rests on successful transformation of Alexandra Technopark and China Square Central Podium, which are currently undergoing asset enhancements. 
  • Our Target Price is raised to SGD1.49 (from SGD1.39, 4% downside). Maintain NEUTRAL.

Maiden yield accretive acquisition of UK business park. 

  • In Dec 2017, Frasers Commercial Trust (FCOT) announced the joint acquisition of a 50% stake in Farnborough Business Park (FBP) with sponsor Frasers Centrepoint Ltd. The total purchase consideration of GBP174.6m (SGD314.8m) was done at par with the latest valuation. The deal is slated for completion by end- January. 
  • We view the move favourably, as the properties’ pro-forma NPI yield of 6.4% is considerably higher than its current ~5.5% portfolio yield. Additionally, the freehold asset has a good quality tenant mix, with a long weighted average lease expiry (WALE) of 8.3 years. 
  • The expanded investment mandate would also strengthen its sponsor pipeline to three other UK assets.

Overhang from potential equity fund raising (EFR). 

  • The initial funding for the aforementioned acquisition is to be done via a bridging loan facility, but FCOT noted that the funding structure would be optimised to comprise a combination of debt and equity. 
  • We expect management to opt for a 50-50 funding structure (equity/debt) to enhance the debt headroom potential for future acquisitions. Post EFR, FCOT expects gearing to stay at ~36% levels.

Alexandra Technopark (ATP) undergoing transition. 

  • Post space downsizing by Alexandra Technopark’s key tenants – Hewlett-Packard Enterprise Singapore Pte Ltd (HPE) and Hewlett-Packard Singapore Pte Ltd (HPS) – the building’s near-term occupancy is likely to dip to 60-70%. 
  • Meanwhile, the SGD45m asset enhancements to revamp Alexandra Technopark are slated for completion by mid-2018.
  • In our view, key upside to the share price lies in FCOT’s ability to successfully reposition Alexandra Technopark and raise occupancy amid the competitive office environment.

China Square Central’s (CSC) retail podium’s asset enhancement initiative (AEI) on track for 2019. 

  • China Square Central’s retail podium’s SGD38m AEI is likely to commence this quarter. It is slated for completion by 1Q19. The repositioning would increase the mall’s NLA by 17% to 75,000 sq ft. The revamped mall is to have an improved tenant mix, focused on food & beverage (F&B), wellness, and services providers. 
  • We also expect shopper traffic to pick up post AEI, aided by the completion of the neighbouring Capri by Fraser hotel residence.

Maintain NEUTRAL with a higher SGD1.49 Target Price (from SGD1.39). 

  • We have revised our FY18F-20F (Sep) DPU higher by 3-5% after factoring in FCOT’s recent acquisitions. Our COE assumption is also lowered by 10bps to 8% (risk free rate (Rf): 2.75%, TG: 1.2%) to better reflect the current low-interest environment. 
  • A key positive is a stable and diversified portfolio with upside potential from asset enhancements. 
  • Key risks are weaker-than-expected office demand and unfavourable forex movements

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-24
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.49 Up 1.390