Frasers Commercial Trust - DBS Research 2019-01-21: Lull Before The Lift Off

FRASERS COMMERCIAL TRUST (SGX:ND8U)

Frasers Commercial Trust - Lull Before The Lift Off

Frasers Commercial Trust's 1Q19 DPU of 2.40 Scts (flat y-o-y) in line with expectations.
Underlying soft earnings as expected due to sale of 55 Market Street, weaker AUD, and softer occupancy at ATP.
Awaiting confirmation of Google potentially taking vacant space at ATP.
Maintain BUY, Target Price of S$1.70.

As expected, FRASERS COMMERCIAL TRUST (SGX:ND8U) delivered stable DPU in 1Q19 of 2.40 Scts.
Excluding the distribution of S$3.8m worth of capital gains, underlying 1Q19 DPU would have fallen 8% y-o-y to 1.98 Scts.
The decline in underlying DPU is largely to due to the absence of income following the sale of 55 Market Street, depreciation of the AUD, and lower occupancy at Alexandra Technopark (ATP) as HP progressively vacates the property. These factors also resulted in 1Q19 revenue and NPI falling 11% and 15% y-o-y respectively.
Meanwhile, Frasers Commercial Trust's overall portfolio committed occupancy stood at 83.8%, down from 86.6% in 1Q18 with actual occupancy marginally up to 80.7% from 80.3% in 1Q18.

Excluding 55 Market Street, the majority of Frasers Commercial Trust's properties reported weaker y-o-y performances.
1Q19 NPI for China Square Central was down 3% y-o-y to S$3.8m as the property was impacted by lower effective occupancy (closure of retail podium), despite overall committed property occupancy rising to 97.2% (96.3% for the office component) from 93.2% (93.0% for the office component) in 1Q18.
Earnings contribution from Alexandra Technopark also fell 24% y-o-y to S$5.8m on the back of HP progressively moving out of the property. Committed occupancy stood at 68.6% (63% effective), down from 70.2% and 79.6% at end 4Q18 and 1Q18 respectively.
Owing to the depreciation of the AUD, NPI for Frasers Commercial Trust's Australian properties - Central Park, Caroline Chisholm Centre and 357 Collins Street - declined by 11%, 6% and 4% y-o-y respectively.
Earnings for Central Park and 357 Collins Street were also impacted by the higher amortisation of lease incentives.
Committed occupancy for Central Park and 357 Collins were stable y-o-y at 71.5% and 98.9% respectively, although higher than 70% and 95.0% in 4Q18. Caroline Chisholm Centre remains fully occupied.
Finally, 1Q19 NPI for Farnborough Business Park (FBP) was up 63% q-o-q largely due to a decline in repair and maintenance expenses, which is usually seasonally higher in 4Q. There is no y-o-y comparison as FBP was only acquired on 29 January 2018. Occupancy for FBP remains stable at 98.1%.

Following renewals of leases, around 11% of lease by gross rental income will be up for renewal in the remainder of FY19, down from 13% in the prior quarter.
We understand Frasers Commercial Trust was able to achieve positive rental reversions at China Square Central while slight negative reversions were recorded at Alexandra Technopark.
For FY20, another 10.7% of leases will be up for renewal.

Gearing was flat q-o-q at 28.4% but down y-o-y from 34.8% following the disposal of 55 Market Street.
Average interest cost of c.3% was stable q-o-q and y-o-y.
Meanwhile the proportion of fixed rate debt increased to 90.0% from 81.2% at end 4Q18.

We understand going into 2Q19, HP will finally vacate the last remaining space it occupies at Alexandra Technopark which is equivalent to 9% of the building. This should result in occupancy dropping to c.60%. However, recent press reports have indicated that Google may be close to signing a lease to take c.400,000 sqft of space which would mean that Alexandra Technopark would be close to fully occupied.

With 1Q19 results in line with expectations, we maintain our BUY call and Target Price of S1.70.
We remain bullish on Frasers Commercial Trust's medium term prospects as we believe, upon the backfilling of the vacant space at Alexandra Technopark following the S$45m AEI, Frasers Commercial Trust's DPU will no longer be reliant of capital distributions and its recent expansion into the UK now places the REIT back on the growth path.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-01-21

SGX Stock Analyst Report BUY MAINTAIN BUY 1.700 SAME 1.700