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FCOT – DBSV

18 May 2012
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On track to unlocking more value

Enhancing China Square Precinct. Frasers Commercial Trust (“FCOT”) together with Far East Organization (“FEO”) and The Great Eastern Life Assurance announced that they will be undertaking asset enhancement initiatives (AEI) to revitalise the China Square Precinct. The AEI works under the China Square Precinct Master Plan is expected to improve connectivity and integrate the companies’ respective developments, namely China Square Central (“CSC”), Far East Square and Great Eastern Centre, into a precinct known as “China Place.” One of the key features of the China Square Precinct Master Plan is the construction of a covered link way between the three properties and future Telok Ayer MRT station. The link way will cost an estimated S$14m which will be shared equally among the three partners. This project will commence in June 2012, and targeted for completion by February 2013. Separately, FEO is planning two hotel developments within Far East Square. These developments comprise a 37-room designer boutique hotel that will be converted from offices within the conservation shop houses, and a new 28-storey 292-room hotel.

Impact on FCOT:

More room to drive rents and occupancy up. While impact on earning is minimal in the shorter term, we view this exercise positive for CSC as this will help to improve connectivity to the MRT station and inject more vibrancy to the area, enabling it to better compete with surrounding properties in view of the upcoming supply. This would pave the way for FCOT to optimize CSC’s retail mix and at the same time drive up occupancy, which is at 91% and raise signing rents if possible, which is currently >S$6 psf per month. We believe more value could be extracted from CSC including the possibility of a hotel development in the longer term. CSC contributed about 18% to FCOT NPI in 2Q12.

Strong balance sheet. Gearing is expected to remain unchanged at its current level of 36.1%. We expect FCOT to fund its c.S$4.6m portion by internal sources including the sales proceeds from its recent sale of Keypoint.

Maintain BUY, more upside from the coming refinancing. We continue to like FCOT for its undemanding valuation at 0.7x P/BV and attractive FY12/13F yields of 6.4 – 7.5%. Since the beginning of last year, FCOT has been taking pro-active steps to reshape its portfolio and strengthen its balance sheet. We expect to see more upside in earnings when the company refinances its S$500m SGD loan due in November this year at a more attractive interest rate. Maintain BUY at an unchanged TP of S$1.24.

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