FCOT – CIMB

Minimal dilution impact from CPPU conversion

Frasers Commercial Trust (FCOT) recently announced that 9.37m new ordinary units have been issued following the conversion of 11.1m Series A CPPUs. The conversion enlarges FCOT’s share base by c. 1.4%, which will result in marginal dilution for existing shareholders.

As such, we lowered our FY13-15 DPU estimates by around 1.4% to account for the slightly larger share base. We maintain our Outperform rating and see catalysts from the additional hotel GFA at China Square Central, while lowering our target price to S$1.45 to reflect the slight dilution.

What Happened

FCOT recently announced the issuance of 9.37m new ordinary units following the conversion of 11.1m Series A Convertible Perpetual Preferred Units (CPPUs) at a conversion price of S$1.1845/unit.

What We Think

This conversion exercise of CPPUs into ordinary units was largely within expectations as the stock continues to trade above the conversion price of S$1.1845/unit, while the gearing remains at c.39%.

FCOT has been redeeming its CPPUs since Dec12, costing the trust an average yield of 5.5% annually. Together, the two redemption exercises (Dec 12 and Apr 13) took 95.8% of CPPUs off the market, leaving only 14.3m units.

With the latest conversion exercise, only 1.055m of CPPUs-translating to c.890k ordinary shares -are left on the books. We see limited pressure on the stock if these CPPUs are converted into ordinary units.

What You Should Do

We continue to favour FCOT for the additional hotel GFA planning permission at China Square Central. While management continues to evaluate the potential of the 16,000sqm hotel site, we believe this will provide the next boost to FCOT’s books(c.10-15% to book value) as we expect the hotel to be valued at S$300m-S$350m upon completion. We maintain our Outperform rating and target price of S$1.47,which implies a 6% FY14 dividend yield-largely inline with the office REITs’ average yield of 6.2%.