Frasers Commercial Trust - RHB Invest 2019-06-27: Google Signs Alexandra Technopark Lease


Frasers Commercial Trust - Google Signs Alexandra Technopark Lease

  • NEUTRAL, new SGD1.65 target price from SGD1.50, 1% downside.
  • Google renting space in Alexandra Technopark removes a key overhang, and should help fill the earnings void after anchor tenant HP Enterprise’s exit. With greater clarity on earnings, we cut COE assumptions by 20bps to 7.8% and raise terminal growth to 1.5% (from 1.25%).
  • As the stock has gained 13% over the past month, we believe most of the news is priced in. We recommend that investors buy on dips.

Google to occupy one-third of Alexandra Technopark (ATP).

  • As widely anticipated (see our 21 Jan note, Frasers Commercial Trust - RHB Invest 2019-01-21: Awaiting Clarity On Alexandra Technopark), FRASERS COMMERCIAL TRUST (SGX:ND8U) has announced that Google Asia Pacific (Google) will take up c.344,100 sqf of space in the newly-revamped Alexandra Technopark for five years from 1Q20 onwards.
  • Google currently occupies about 0.5m sqf in neighbouring Mapletree Business City II, and this move is a part of its expansion plan. The signing of the lease is also a testimony to the strong tenant appeal of the refurbished Alexandra Technopark, post its recent SGD45m asset enhancement initiative (AEI).

Committed occupancy rate post-recent lease signing stands at 93.7%, vs 59.2% as at March.

  • We expect the signing rental rate to be slightly higher than SGD4 psf – which translates to a mild positive rental reversion (compared to HP’s rental rate of slightly under SGD4 psf). Based on a rental rate assumption of SGD4.20 psf, the Google lease is expected to contribute about SGD10.6m in NPI annually (~11% of FY18 NPI).

Acquisitions the likely key catalyst ahead.

  • Frasers Commercial Trust’s current gearing of 29.1% is one of the lowest among the S-REITs. This gives it a debt headroom of c.SGD35 for acquisitions.
  • In the near term, we believe Frasers Commercial Trust may consider acquiring the UK – once Brexit-related uncertainties are removed – due to their attractive key cities in Australia, while a Singapore looks unlikely, in our current yields are too accretive acquisition.

CBD rejuvenation plans will benefit China Square Central (CSC).

  • The Government’s CBD, combined with the Capri by Fraser China Square (a hotel) will benefit CSC (ie offices), where a majority of leases are due for AEI works on the retail podium are also should start contributing to total numbers by 50% to increase to almost 80% scheduled AEIs are.

DPU adjustments.

  • We lift FY20-21F DPU by 1-3%, factoring in the higher occupancy rate at Alexandra Technopark.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-06-27
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.65 UP 1.500