FCOT – OCBC

2Q11 annualised DPU yield of 8%; Maintain BUY

2Q11 Annualised DPU Yield of 8%. Frasers Commercial Trust (FCOT) posted it 2Q11 results on Thursday, which was in line with our expectation and street estimates. 2Q11 gross revenue was flattish YoY but rose 2.2% QoQ to S$29.6m. This was due to higher revenue contribution achieved from Central Park and KeyPoint as a result of an increase in occupancy rates, which was offset by the loss of revenue contribution from Cosmo Plaza following its divestment on 18 Jan 2011. This also increased its NPI by 1% YoY and 3.9% QoQ, as Cosmo Plaza has been generating negative NPI since 4Q10. We are also witnessing an improvement in NPI margin, which rose from 78.9% in FY10 to 80.5% in the quarter. Distributable income is up 2.4% YoY and 27.6% QoQ. 2Q11 DPU is 1.61 S-cents, representing an annualised yield of 8%. Gearing also edged down 2% from 1Q11 to 37.8%.

Portfolio Performance. Overall portfolio occupancy grew by 5.9 pp to 97.7% from last quarter. This was boosted by the rise in occupancy for both Singapore and Australia portfolio plus the divestment of Cosmo Plaza. In particular, Australia portfolio has achieved 100% occupancy rates led by new leases by Jones Lang LaSalle and Hamersley Iron. In Singapore, portfolio occupancy rates grew from 97% to 97.4% driven by the commencement of new leases for both 55 Market Street (55MS) and KeyPoint which include Gabriel Law Corporation, Corporate Serviced Offices and L’Oréal. However, 55MS is still experiencing negative rental reversions, with FY11 average passing rent at S$10.50 psf pm while new leases are signed at S$6-S$6.50 psf pm. According to our estimates, 55MS is likely to rise out of negative territory only after 2013. Keypoint is also undergoing negative reversions, albeit at a lesser magnitude with average passing rent and spot rent at S$5.40 psf pm and S$5.10 psf pm respectively; but management expects a turnaround by end of the year.

Looming Dent on Japan Assets. FCOT’s Japan assets account for 9.6% of its gross revenue. We noted that 100% of the leases for the Azabu building in Tokyo and 65.5% for Galleria Otemae in Osaka are expiring by FY12. We remain wary of the prospects in Japan, as office rentals are unlikely to see further uplift after the earthquake episode. Furthermore, some occupiers have postponed or are reassessing their office strategies, which will likely delay the market recovery. In fact DTZ has forecasted Grade A office rents for Tokyo to decline further, only showing growth in 2013. Maintain BUY with a reduced fair value of S$0.89.