Frasers Commercial Trust - OCBC Investment 2019-10-23: Deep Pockets To Sustain Attractive Yield

FRASERS COMMERCIAL TRUST (SGX:ND8U)

Frasers Commercial Trust - Deep Pockets To Sustain Attractive Yield

FRASERS COMMERCIAL TRUST (SGX:ND8U)’s 4QFY19 results were in-line with our expectations. Gross revenue rose 1.3% y-o-y to S$32.9m, while NPI inched up 0.5% to S$21.7m. All properties registered higher y-o-y revenue growth, but NPI was down for Alexandra Technopark (ATP) (-0.3%) and 357 Collins Street (- 8.0%). See Frasers Commercial Trust Announcements.
DPU for the quarter came in unchanged y-o-y and q-o-q at 2.40 S cents, as management continued to smoothen its DPU profile with distributions from capital returns (S$6.7m in 4QFY19 versus S$5.1m in 4QFY18).
For the full-year, Frasers Commercial Trust’s NPI fell 7.4% to S$82.7m, but DPU of 9.60 S cents was similar to FY18 and this also matched our forecast. See Frasers Commercial Trust Dividend History.

Following the completion of the AEI at Alexandra Technopark in Jan 2019, management has closed ~490k sq ft of transactions, which of course includes the Google lease (~33.3% of Alexandra Technopark’s NLA). Signing rents in 4QFY19 for the property came in at S$4.30-4.60 psf/month, showing continued improvement and also coming in strongly above the average passing rent of S$3.97 psf/month as at end-2018.
Although it was previously highlighted that Microsoft had exercised its rights to end its lease early (77,761 sq ft) in Jan 2020, Frasers Commercial Trust has successfully backfilled 72% of the space and is in advanced negotiations for the balance. We believe rental reversions for the replacement leases have been positive.
In local currency terms, Frasers Commercial Trust’s portfolio saw higher valuation for all its properties, with the exception of Caroline Chisholm Centre. Total portfolio value rose 4.4% in SGD terms as compared to end-FY18.
While a lot of attention has been focused on WeWork (contributed 2.7% of Frasers Commercial Trust’s gross rental income as at 30 Sep 2019), we understand that its operations at China Square Central are healthy, with underlying utilisation rates >90% and no rental arrears.

Looking ahead, we estimate that Frasers Commercial Trust still has ~S$146m available for capital top-ups, the bulk of which comes from the gains from the disposal of 55 Market Street. This would allow Frasers Commercial Trust to sustain its DPU before the pre-committed leases commence.
On account of Frasers Commercial Trust’s strong balance sheet (below industry average gearing ratio of 28.6%), improved operational outlook and prudent approach to acquisitions, we lower our cost of equity assumption from 7.8% to 7.5% and lift our fair value from S$1.70 to S$1.76. See Frasers Commercial Trust Share Price; Frasers Commercial Trust Target Price.
Frasers Commercial Trust's FY20F distribution is attractive at 5.9% (as at 22 Oct close).

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-10-23

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.76 UP 1.700