Frasers Commercial Trust - OCBC Investment 2018-04-23: You Don’t Always Have To Get Grade A

Frasers Commercial Trust - OCBC Investment 2018-04-23: You Don’t Always Have To Get Grade A FRASERS COMMERCIAL TRUST ND8U.SI

Frasers Commercial Trust - You Don’t Always Have To Get Grade A

  • Time to ride the Grade B wave
  • Focus on valuations
  • Appealing growth prospects

Some misses this quarter

  • Frasers Commercial Trust’s (FCOT) 2QFY18 results were a shade under our expectations. Gross revenue dropped 18.0% y-o-y to S$33.0m, comprising 21.6% of our full-year forecast. 
  • Lower occupancies were registered across a number of assets, though some of these were anticipated. 
  • The absence of a one-off payment in relation to a lease termination at Central Park in 2QFY17 and an average weaker Australian dollar vs SGD also weighed on the top-line. 
  • All considered, DPU for the quarter fell 4.4% y-o-y to 2.40 S-cents.

Grade B CBD Core recovery story intact

  • In relation to rental rates at FCOT’s China Square Central (CSC) office tower, management struck us as being more positive than previously, highlighting good level of enquiries coming through. This is in-line with our expectations of a Grade B CBD Core recovery coming on the heels of a similar recovery seen by their Grade A peers. 
  • According to CBRE, Grade B CBD Core office rents have increased 2.0% q-o-q to S$7.60 psf, representing the 3rd consecutive quarter of q-o-q gains. However, we are cognizant that any meaningful impact might only be seen from FY19, as 43.3% of leases at CSC (by gross rental, excluding the retail podium) are due to expire then. 
  • As for Alexandra Technopark (ATP), we  believe that ~20% (or ~100k sqft) of total space leased by the two HP entities (both previously and currently) has been backfilled. We think that the current AEI at ATP, which is due to be completed around mid-2018, should help  to provide a boost to signing rents moving forward.

Still with room for yield compression

  • We reiterate our view that FCOT’s forward yield of 6.7% still has some room for compression, given 
    1. its forward yield of ~5.5% at the start of the last rental recovery cycle in 1H 2013, and 
    2. relatively stretched valuations among its Grade A peers. 
  • Among our adjustments, we incorporate less bullish occupancy assumptions and lower our FY18 DPU forecast from 9.92 to 9.82 S-cents. However, we also increase our terminal growth rate from 1.5% to 1.75%, reflecting our positive view on FCOT’s inorganic growth prospects in Europe, especially given recent developments involving other companies within the Frasers Group. 
  • All considered, our fair value rises slightly from S$1.51 to S$1.54.

Joseph Ng OCBC Investment | 2018-04-23
SGX Stock Analyst Report BUY Maintain BUY 1.54 Up 1.510