FCOT – CIMB

A stable REIT

Frasers Commercial Trust (FCOT) has just announced its 1QFY14 results, posting a drop of 3.1% yoy in revenue, but a gain of 29.7% in DPU. Its 1QFY14 earnings were in line, with both revenue and DPU accounting for 24% of our full-year estimates. The higher DPU was mainly attributed to the savings from the buyback of the convertible perpetual preferred units (CPPU) in FY13. We maintain our Add rating, with an unchanged DDM-based (discount rate: 8.8%) target price of S$1.39. Positive catalysts expected to come from organic growth and the potential sale of the hospitality site at China Square Central.

Stable portfolio slightly dampened by forex losses

During 1QFY14, both gross revenue and NPI decreased to S$28.8m (-3.1% yoy) and S$22.1m (-3.5% yoy), respectively. Although its topline was lower, DPU grew by an impressive 29.7% yoy. The stronger DPU was mainly attributed to higher income from the additional 50% interest in the Caroline Chisholm Centre, higher rental rates, lower interest costs and the redemption of CPPU. The weaker revenue, a result of the weaker Australian dollar and the slightly lower occupancy for Central Park, was partially offset by the stronger Singapore portfolio performance which achieved a higher gross revenue of 7.5% yoy.

Good organic growth built in

For FY14, we expect additional contribution from China Square Central as the property benefits from the completed AEI and the new Telok Ayer MRT station, which in turn could boost the attractiveness of this office property. The NPI contribution from China Square Central rose by 15% yoy in 1QFY14, while occupancy has risen steadily from 74% in 4QFY13 to 92.9% committed occupancy in December 13. Although Alexandra Technopark is expected to post good organic growth, we believe that the bulk of growth will only be seen in FY15 as the masterlease expires in Aug 14.

We maintain an Add rating

FCOT currently offers 6.8% FY14 dividend yield and 5.0% NPI yield. Compared to the sector average of 6.3% and 4.2%, respectively, we continue to see value in FCOT and maintain our Add rating with an unchanged target price of S$1.39. Further upside surprises may come from the potential divestment of the hospitality site at China Square.