FCOT – DBS

One in the Bag


Story: The much awaited re-financing of Frasers Commercial Trust (FCOT)’s short-term S$70m loan expiring in Nov’08 has been finalized. The loan was obtained from their parent F&N for a period of 6 months to March ‘09 at a cost of 3.7%. The manager aims to refinance this loan together with the S$550m tranche expiring in 2009. Given the strong backing of F&N as its sponsor, we believe that re-financing of these loans should not be a problem.

Point: During our post results road show and results briefing, these issues were highlighted.

(1) strategic review continues. Management of FCOT will be keen to divest its Japanese exposure (valued at S$228m) when the opportunity arises. This is astute given the parent’s relatively lack of exposure in Japan. Its Australian assets remain as part of FCOT plans moving forward, given its strong underlying cash flow.

(2) the need to re-capitalize and a stronger balance sheet. At gearing of 49% vs S-Reits 30+%, FCOT’s high financial leverage not only incurs high debt servicing costs but also exacerbates the perceived risk given the current tight liquidity environment. We believe that ways that management could explore in solving the current gearing issue will be through (i) an asset sale, possibly Japanese assets, (ii) equity raising either from a straight asset swap or fresh equity call.

(3) Improving operational performance. Management will continue to optimize yields at its assets, particularly Keypoint where occupancy has fallen to 75% in Sept’08. Management aims to bring it up to 90% by end FY09.

Relevance: While FCOT remains one of the cheapest reits at 0.2x P/BV, the overhang of its ST debt re-financing needs with an overhang from a possible equity raising could likely weigh on share price performance in the near term. As such, we maintain HOLD, TP $0.31, pending affirmation of abovementioned plans.