FCOT – Phillip
Strategic review takes a twist. The new management has decided to ditch the divestment plan of the Australian assets. Previous asset enhancement projects at Keypoint and China Square Central were put on hold. It has also dropped plans for a hotel development at China Square Central with a view of rising construction cost and lower tourist arrivals. It will instead focus on recapitalizing the balance sheet and active asset management to retain tenants and maximizes lease renewals.
No catalyst in sight. Fraser Commercial Trust (FCOT) faces significant headwind and sees some pressing issues it needs to address.
Key issue 1: Asset revaluation a risk to breaching gearing limit. FCOT latest valuation of its properties recorded an S$126.2million (-6.6%) loss to its asset value. NAV per unit is cut from $1.39 to 1.21. We see further risk in cap rate expansion resulting in lower property values, which might increase the gearing ratio. It has one of the highest gearing ratio among the SREIT. FCOT current gearing is 48.6%. We think it is stuck in a difficult position to reduce the gearing, as the plausible ways are not favorable. Judging by the strategic review outcome, an asset sale was already ruled out. An equity fund raising (EFR) might not be able to raise the expected amount due to the weak equity market climate. At the current price level, a pure EFR would be highly dilutive as well.
Key issue 2: FCOT has S$70 million debt due on 22nd Nov 2008. This is supposed to be repaid with the redemption proceeds from AWPF, however management has mentioned there will be no redemption. We believe FCOT should be able to secure refinancing given its sponsor relationship. However we have also assumed a higher interest margin along with the refinancing.
Valuation and recommendation. FCOT is trading at approximately 80% discount to its NAV. Although cheap on a relative basis, we are of the view that sentiments may not pick up in the short term. Our concern stem from the following points; 1) high gearing ratio, 2) probable dilution from EFR, 3) high borrowing cost, 4) worsening rental outlook and asset value. We are downgrading our call to Hold with a fair value of $0.21.