FCOT – OCBC

Heading the right direction with divestment of Cosmo Plaza

1Q11 DPU of 0.25 S-cents. Frasers Commercial Trust (FCOT) announced 1Q11 gross revenue of S$29m, which declined 2.3% YoY and 1.1% QoQ. This was mainly attributed to the lower contribution from Cosmo Plaza as a result of the expiry of a significant tenancy in Aug 2010. Subsequently, FCOT successfully completed the divestment of Cosmo Plaza on 18 Jan 2011, Amount available for distribution to unitholders is S$7.9m, an increase of 6.7% from a year earlier, amounting to a 1Q11 DPU of 0.25 S-cents.

Successful Divestment of Cosmo Plaza. As part of capital recycling, FCOT has been trying to divest Cosmo Plaza since 3Q09, but found no suitable buyer. Cosmo Plaza has been affected by the economic slowdown in Japan, which saw its occupancy rate dipped from a peak of 100% in 2008 to a trough of 26% in 2010. FCOT made a gain on disposal of approximately S$7.28m from the transaction. We have assumed the sale proceeds will be used to pare down FCOT's debt, which matured mostly in 2012. We view this divestment favorably, as it will improve the overall quality of the portfolio and lower FCOT's gearing from 39.8% to slightly below 38%. Overall portfolio occupancy will also improve from 91.8% to above 96%.

Portfolio Performance. Both 55 Market Street (55MS) and KeyPoint saw a rise in occupancy rate in 1Q11, but gross revenue fell 13% QoQ for 55MS. We think that 55MS is possibly still experiencing negative rental reversions. According to our estimates, 55MS is likely to bottom-out of negative territory only in 2012-2013 (factoring in its lease expiry profile), while China Square Central (CSC) and Keypoint should turn positive much earlier. For the Australian properties, average occupancy rate remains healthy at 95.3%. Excluding Cosmo Plaza, the average occupancy rate for the Japan properties is 93.0%.

Maintain BUY. FCOT is currently trading at a PBR of 0.44x, which is lower than its historical PBR of 0.54x since listing. We believe that one reason could be a legacy issue; this being FCOT was formerly known as Allco Commercial REIT before it was bought over by FCL in 2008. Given the strong sponsor, capable manager and stable income, we feel that the high discount is unwarranted. As a first step, the manager is heading the right direction by divesting low income-producing assets. We anticipate further scope for the manager to grow income through asset enhancement initiatives and acquisitions. Maintain BUY with an unchanged fair value of S$0.18.