Frasers Commercial Trust - OCBC Investment 2019-04-24: Hey Google… Are We There Yet?


Frasers Commercial Trust - Hey Google… Are We There Yet?

  • Upside to Alexandra Technopark occupancy.
  • Frasers Tower acquisition unlikely.
  • Fair Value of S$1.58.

In-line set of results

  • FRASERS COMMERCIAL TRUST (SGX:ND8U)’s 2QFY19 scorecard was within our expectations. Distributable income rose 5.2% y-o-y to S$21.7m, due to contribution from Farnborough Business Park (equity accounted), distribution from capital returns (~S$4.9m) and the effects of management fees taken in units.
  • Frasers Commercial Trust's DPU for 2QFY19 came in flat y-o-y at 2.4 S-cents, representing 25.0% of our full-year forecast.
  • The manager has noted that Frasers Commercial Trust still has ~S$159m available for capital top-ups, including the gains from the disposal of 55 Market Street.

Taking a constructive view on Alexandra Technopark

  • Alexandra Technopark’s committed occupancy remained unchanged at around 60% since 1QFY19. Given Alexandra Technopark’s improved product offering post-AEI, lower-than-peers asking rents and the tight occupancies in the area, we believe it is highly unlikely that a quarter has gone by without meaningful offers from various parties for available space at Alexandra Technopark. Thus, we deem it likely that the manager could still be in advanced negotiations with Google, which is reportedly interested in taking up ~400k sqft at Alexandra Technopark.
  • Separately, we note that Microsoft has chosen to exercise its right to pre-terminate its lease two years early (~77.8k sqft) at Alexandra Technopark on Jan 2020.

Addressing speculation; other positive news

  • There has been speculation as to whether Frasers Commercial Trust will be acquiring Frasers Tower from its sponsor. We believe this is unlikely, as the manager has mentioned that its near-term acquisition plans should not involve Singapore, given the tight yields.
  • At Central Park, a S$23m AEI (or S$11.5m for Frasers Commercial Trust’s 50% share) will take place to improve the asset’s offering, and is expected to have minimal impact on tenanted spaces.
  • We also note that Capri by Fraser is slated to commence operations in 2Q2019, which should positively impact China Square Central’s retail podium when it completes its AEI in 2H2019.

Fair Value of S$1.58

  • In our view, the positives outlined above should help to compress the yield spread between Frasers Commercial Trust and CapitaLand Commercial Trust (SGX:C61U); this spread currently stands at 1.85 ppts, which is 0.4 S.D. above the 7-year mean.
  • Using a lower risk free rate of 2.3% (2.7% previously), we increase our Fair Value slightly from $1.56 to $1.58.
  • Maintain BUY.

Wong Teck Ching Andy CFA OCBC Investment Research | https://www.iocbc.com/ 2019-04-24
SGX Stock Analyst Report BUY MAINTAIN BUY 1.58 UP 1.560