FCOT – CIMB

Room for further organic growth

Frasers Commercial Trust (FCOT) has just announced its 2QFY9/14 results, posting a drop of 3.7% yoy in revenue but a gain of 3.2% in DPU. Its 2QFY14 earnings were in line, with both revenue and DPU accounting for 24% of our full-year estimates. 1H DPU made up 48% of our full-year forecast. The higher DPU was mainly attributed to the savings from the buyback of 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 could come from organic growth and the potential sale of the hospitality site at China Square Central.

Weak Australia portfolio vs. strong Singapore assets

During 2QFY14, both gross revenue and NPI decreased to S$28.6m (-3.7% yoy) and S$21.7m (-5.8% yoy), respectively. Although FCOT’s topline was lower, DPU continued to grow by 3.2% yoy. The stronger DPU was mainly attributed to the redemption of CPPU and the better performance in China Square Central, which was partially offset by the weaker Australian dollar, lower occupancy for Central Park and higher expenses for the Caroline Chisholm Centre due to painting works undertaken. During the quarter, its Singapore portfolio continued to achieve better performances with a higher NPI of 5.7% on the back of strong rental reversion ranging from 6.4% to 18.2%.

Stable portfolio with potential organic growth

The occupancy for the trust grew to 97.5% (vs. 95.3% a year ago) while the leverage ratio remained at a manageable level of 37.8%. For FY14, we expect additional contribution from China Square Central as the property continues to benefit from the completed AEI and the new Telok Ayer MRT station. In addition, Alexandra Technopark is expected to post good organic growth when the master lease expires in Aug 14. With only 3.9% of leases (as a percentage of gross rental income) up for renewal in FY14 and 7.0% in FY15, we expect the occupancy to remain stable while earnings continue to grow organically on the back of built-in step-up rents (2.9-4.7% p.a.) for more than 41% of total leases.

We maintain an Add rating

FCOT offers a 6.8% FY14 dividend yield and a 5.1% NPI yield. Compared to the sector average of 6.0% 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.