Frasers Commercial Trust - RHB Invest 2018-04-23: Operational Weakness To Persist In The Near Term

FRASERS COMMERCIAL TRUST ND8U.SI

Frasers Commercial Trust - Operational Weakness To Persist In The Near Term

Frasers Commercial Trust (FCOT) reported a weak set of 2QFY18 operational numbers, with a lower overall occupancy rate across its Singapore and Australia assets. The impact on DPU was, however, mitigated by a maiden contribution from recently-acquired Farnborough Business Park (FBP), higher capital distribution, and 100% of its management fees being paid in units.
We expect the operational weakness to persist until end-2018, with planned vacancies in Alexandra Technopark (ATP) and downtime from AEI works.

We expect its performance to turn around by 2H19, with the completion of its asset revamp coinciding with the positive outlook for the office market.
The stock currently offers a FY18F yield of 6.5%, and is trading at 0.98x FY18F P/BV – which we deem as fair, considering the near-term challenges.
Maintain NEUTRAL, with an unchanged Target Price of SGD 1.49 (2% upside).

Frasers Commercial Trust’s (FCOT) 2QFY18 revenue and NPI declined 18% and 25% y-o-y respectively, on the back of lower occupancy rates for its Singapore and Australia office properties, the absence of one-off lease termination payments (~SGD0.8m) in Central Park, and the effect of a weaker AUD vs SGD.
Impact to its DPU, however, was mitigated by a maiden contribution from 50%-owned Farnborough Business Park (FBP), 100% of management fees being paid in units (0% for 2QFY17) and higher capital distribution.
Overall, its committed overall occupancy rate is at 83.5% (1QFY18: 86.6%), with a weighted average lease expiry (WALE) of four years. The results are in line with our expectation, with 2QFY18 and 1HFY18 DPU respectively accounting for 25% and 50% of our full-year forecasts.

Management has, so far, back-filled 100,000 sqf of space vacated by Hewlett Packard Enterprise Singapore (HPE) and Hewlett-Packard Singapore (HPS). It noted that new leases signed so far are on par with rental paid by HPE and HPS.
As at 2QFY18, the committed occupancy rate of the building is at 70.4%, and we expect the near-term rate to dip to ~60-65%, with HPS vacating another c.135,756 sqf (~13% of total NLA) in two phases (April and December).
Meanwhile, the planned SGD45m asset enhancement initiative (AEI) to revamp the asset is on track to be completed by mid-2018. Management noted that leasing inquiries have increased, but will remain selective in choosing tenants in order to maximise the yield and better reposition the asset.

Management is seeing an increase in office leasing enquiries, in line with the recent pick-up in office market activity in the central business district area. China Square Central retail podium’s SGD38m AEI commenced in 1Q18, and is expected to be completed by 1Q19. It will remain closed during the AEI.
The repositioning would increase its malls’ NLA by 17% to 75,000 sqf. The revamped mall would also have an improved tenant mix, focusing on food and beverage, wellness, and services.
We expect shopper traffic to pick up post-AEI – aided by the completion of a neighbouring serviced residence project, ie Capri by Fraser.

The acquisition of FBP was completed on 29 Jan, with maiden contributions booked in the quarter. Management’s outlook for its UK business park is positive, and expects the ongoing Brexit negotiations to have a minimal impact on the demand for space.
Gearing remains modest at 35.3%, post the completion of its new unit placement in February to raise SGD100m.

Our DDM-derived Target Price is at SGD1.49 (CoE: 8%, TG: 1.2%).
Key positives are 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/ 2018-04-23

SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.490 Same 1.490