Frasers Commercial Trust - CIMB Research 2018-04-20: Focus Still On Alexandra Technopark

FRASERS COMMERCIAL TRUST ND8U.SI

Frasers Commercial Trust - Focus Still On Alexandra Technopark

Frasers Commercial Trust (FCOT)'s 1HFY18 DPU of 4.8 Scts is in line with our projections, at 50% of our FY18 forecast.
2QFY18 topline was adversely impacted by lower portfolio occupancy and the weaker Aussie dollar vs SGD.
We expect continued income pressure to be felt from Alexandra Technopark.
FCOT expects China Square Central’s (AEI) to be completed in mid-2019.

Frasers Commercial Trust (FCOT) reported an 18% y-o-y drop in 2QFY18 gross revenue to S$33m while distribution income rose 3% y-o-y to S$20.6m, thanks to maiden contribution from its 50% stake in Farnborough Business Park in the UK and divestment gain of S$2.9m.
2Q DPU of 2.4 Scts was down 4% y-o-y due to a private placement in Feb 18 to partially fund the purchase of the UK business park. At half time, distribution income and DPU of S$40m/ 4.8 Scts was in line with expectations and made up 50% of our FY18 forecast.

The drag on topline was due to lower portfolio occupancy of 79.4% (vs. 80.3% in 1Q), absence of one-off payment for termination of lease in Central Park in 1QFY17 and weaker Aussie dollar (vs SGD).
Singapore portfolio’s committed occupancy slipped to 76.1% (vs. 83.3% in 1Q) due largely to expiry of more Hewlett Packard/Hewlett Packard Enterprise (HP/HPE) leases while take-up for the Australian portfolio dipped 1.2% pts to 89.5%.

Occupancy for Alexandra Technopark stands at 70.4% at end 2QFY18 with additional space given back by HP/HPE. FCOT has been able to back-fill c.100,000 sq ft of the vacated space so far. The latter has another c.149,000 sq ft of leases expiring from 2HFY18 to 1QFY19. Hence, we expect income volatility will still be felt from this property.
The planned S$45m AEI is underway and includes new amenities such as end-of-trip facilities and a new central plaza. This should enhance the attractiveness and rental competitiveness.

China Square Central’s performance was affected by the closure of the retail podium since Jan 18. The retail podium is undergoing an S$38m enhancement programme to be repositioned with focus on F&B, wellness and services. The mall is expected to be re-opened in mid-2019 with a larger NLA of 75,000 sq ft.
In addition, completion of a new 304-room Capri by Fraser hotel (developed by sponsor Frasers Property Limited) will likely bring increased footfall activity to rejuvenate the property.

With the acquisition of the 50% stake in Farnborough Business Park done via new debt and a private placement of new units, FCOT’s gearing remained relatively steady q-o-q at 35.3% as at end-2QFY18. It debt profile has an average maturity of 2.2 years and cost of 2.99%.
With 82% of its gross borrowings in fixed rate loans, we anticipate any rise in near term interest rates would have limited impact on FCOT’s earnings.

We cut our FY18-20 DPU estimates by 1.6-4.8% and reduce our DDM-based Target Price by 3.2% to factor in the impact of the recently conducted private placement.
FCOT is trading at 6.6% FY18 and FY19 DPU yield.
Upside risk could come from faster than expected leasing of the portfolio vacancies while downside risk could come from longer than expected vacancy at Alexandra Technopark.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2018-04-20

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