FCOT – OCBC

High quality assets, Strong sponsor; Initiate with BUY rating

High quality assets. Frasers Commercial Trust (FCOT) owns 10 properties across three countries with retail and office components. FCOT derives some 52% of its gross revenue from Singapore, which comprises China Square Central, 55 Market Street and Alexandra Technopark. These assets are either high-quality commercial property located near the heart of the financial district or high-tech business space development at the fringe area of the central-region of Singapore. FCOT also owned four commercial properties in Tokyo & Osaka. Other asset includes Central Park (Perth) which is a premium grade office tower and the tallest building in Perth.

Strong sponsor. Sponsor, Frasers Centrepoint Limited (FCL), a wholly-owned subsidiary of Fraser and Neave, Limited (F&N), is a leading Singapore-based property company with a strong global foothold in property development, property investment, serviced residences and investment funds. Apart from financial support, having a developer sponsor also allows FCOT to be granted rights of first refusal to a possibly rich pipeline of sponsor-owned assets for future acquisition. In the near to middle term, StarHub Centre, Alexandra Point and Valley Point are possibly slated asset injection targets for FCOT, if they prove yield-accretive to unitholders.

Stable income. FCOT enjoys a number of blue-chip longtenure leases (such as Commonwealth of Australia, BHP Billiton Petroleum etc.) and master leases that provide longterm income stability to the REIT along with potential for rental upside. Approximately 65% of FCOT’s revenue is derived from such leases. 25% of its gross rental income also has built-in annual rent step-ups. In line with our OVERWEIGHT rating for Office-REITs, we believe that FCOT will likewise be able to ride on the recovery cycle & benefit from positive rental reversions in FY11-FY12. We also see potential to grow income through asset enhancement initiatives and acquisitions.

Valuation. FCOT is trading at a 59% discount-to-book compared to the broader Office-REITs which are trading at 30% discount-to-book. We believe this significant discount is unwarranted, considering FCOT’s high-quality assets, strong sponsor and sound financials. At S$0.16 per unit, FCOT has recently proposed the unit consolidation of five existing units, which it opined will improve market perception and attractiveness of its units. We concur with the manager’s strategy and apply a 40% discount to our RNAV instead, deriving a fair value of S$0.17. This translates to an estimated total return of 12.6% (Price Upside: 6.3%; Distribution Yield: 6.3%). We initiate coverage of FCOT with a BUY rating.