Frasers Commercial Trust - CGS-CIMB Research 2019-04-23: Two Steps Forwards, One Step Back

FRASERS COMMERCIAL TRUST (SGX:ND8U)

Frasers Commercial Trust - Two Steps Forwards, One Step Back

Frasers Commercial Trust’s 1HFY9/19 DPU of 4.8 Scts is within expectations, at c.50% of our FY19 forecast.
There were positive rental reversions at China Square Central, filling up Alexandra Technopark is progressing slowly.
Maintain HOLD. Our Target Price remains at S$1.50.

FRASERS COMMERCIAL TRUST (SGX:ND8U) recorded 2QFY9/19 revenue of S$30.4m, -8% y-o-y while net property income slipped 10% y-o-y to S$20.1m due to income vacuum from divestment of 55 Market St and lower occupancy at Alexandra Technopark (ATP). This was partly offset by higher income from China Square Central (CSC).
Distributable income rose 5% y-o-y to S$22m on the back of higher associate contributions and increased payout of divestment gains of S$4.9m.
DPU stayed flat at 2.4 Scts.1HFY9/19 DPU of 4.8 Scts was in line at c.50% of our full-year forecast.

China Square Central saw an improvement in rental income on positive rental reversion for its office leases. Frasers Commercial Trust has renewed 4.8% of its FY19 expiries at China Square Central with a remaining 1.4% to be renewed for the rest of FY19.
Management expects asset enhancement initiative (AEI) at China Square Central to be completed in 2HCY19. The retail component is scheduled to commence operations towards end of CY19.
Half of the expanded 80k sq ft of retail space has been pre-committed. The new Capri by Fraser, China Square hotel is expected to open in 2QCY19 which should increase footfall and vibrancy at China Square Central, in our view.

Meanwhile, committed occupancy at Alexandra Technopark stands at 59.2% after HP’s exit. Post the S$45m AEI, Frasers Commercial Trust is working towards backfilling the space and having discussions with a number of parties.
During the quarter, Microsoft had exercised its right to reduce its lease term to Jan 2020. Microsoft is a tenant at Alexandra Technopark and contributes c.3.1% of the trust’s gross rental income. While this could likely drag on Alexandra Technopark’s near term outlook, Frasers Commercial Trust can work to backfill the space ahead of the planned departure.

Australia portfolio occupancy has improved to 94% as at end-2Q (vs. 91% in 1QFY19) with WeWork taking up space at Central Park in Perth. At the same time, there are plans to undertake an AEI to upgrade the lobby and forecourt at Central Park. Frasers Commercial Trust’s share of the AEI capex amounts to S$11.5m.
AEI works are scheduled to start in 2QCY19 and be completed by 3QCY20 and should improve attractiveness of the property.

We keep our FY19-21 DPU estimates intact and retain our DDM-based Target Price at S$1.50.
Share price catalysts include faster than expected backfilling of Alexandra Technopark as well as new acquisitions, especially in Australia and the UK.
Frasers Commercial Trust’s balance sheet is robust with a gearing of 29.1%.
Downside risks include longer than expected vacancy at Alexandra Technopark.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-04-23

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.500 SAME 1.500