FCOT – OCBC

DPU GETS ANOTHER THRUST

• Expecting further DPU uplift
  
• Gearing to notch higher
  
• Current valuations still undemanding
  

Second round of CPPU redemption

Frasers Commercial Trust (FCOT) announced that it has successfully exercised the right of redemption for 157.1m Series A Convertible Perpetual Preferred Units (CPPUs). This constitutes 91.6% of the number of CPPUs outstanding. No CPPU has been successfully converted into new units, thus leaving a remaining 14.3m CPPUs in issue. The redemption will take place on 1 Apr, and will be funded via bank borrowings and cash. In addition, the distribution to entitled CPPU holders amounts to S$2.3m, or 1.3562 S cents per CPPU.

Positive impact on DPU

The decision by FCOT to redeem the remaining CPPUs was not expected as we feel that FCOT could have done so in the previous exercise. Nevertheless, we welcome the move as it would lead to an improvement in FCOT’s DPU, given that the CPPU distribution rate is relatively high at 5.5% vs. its average borrowing cost of 3.3%. Furthermore, this would remove any uncertainty pertaining to a possible dilution in unit base from a conversion of the CPPUs (currently in the money). The only trade-off, in our view, would be a higher aggregate leverage, which we believe would rise from 29.2% as at 31 Dec 2012 to ~40% assuming the CPPU redemption is fully funded by debt. This may imply limited debt headroom/higher risk of equity fund raising. However, our sense after talking to FCOT is that there is possibly no immediate acquisition target in sight, while its cash balances are more than sufficient to finance its asset enhancement initiatives for the Precinct Master Plan and China Square Central (both on track for completion).

Maintain BUY with higher fair value

We now project a full CPPU redemption in our model, as it may no longer be economical for FCOT to retain the remaining CPPUs. This raises our fair value from S$1.48 to S$1.52. We continue to like FCOT for its active management, growth potential and undemanding valuations (0.87x P/B vs. average 0.96x P/B for its office peers). Maintain BUY.