Full year results were disappointing, although not unexpected. Revenue was up 42.1%, net property income up 31.8%, but DPU fell 5.1%. Revenue increased on the back of full year contributions from acquisitions and the fall in DPU is mainly attributed to higher borrowing cost.

Portfolio size dropped 13%, mainly due to translation losses of the Australian properties and also downward valuation of AWPF wholesale fund, Keypoint building and Cosmo Plaza. NAV thus fell from $1.42 in FY07 to $0.97 in FY08.

Diversification not a good thing in this case. FCOT has a fairly well diversified portfolio with 43% of revenue contributed by Singapore, 40% by Australia and 17% from Japan. However diversification did not work in this case as the Australia dollars depreciated almost 25% relative to the Singapore dollars over the year. Although FCOT has got currency hedges in place, this has not prevented Central Park and Centrelink recording lower revenue in 4Q08. On a QoQ basis, Central Park revenue fell 23% while Centrelink fell 21%.

FCOT has $620 million to refinance this year, $70 million of which comes due in May 2009 and the rest in Dec 2009. In Nov 2008, F&N demonstrated its show of support by extending a loan of $70 million to FCOT at an interest rate of 3.73%. With its sponsor support, short term financing is not a problem for FCOT. The real test is towards the end of the year where the refinancing quantum is much higher.

We think DPU erosion. We do not think DPU is going to get any respite in the near term. We factor in lower contributions from Australia and also make an allowance for higher tenant vacancies. Another dilution to DPU is the issuance of management fees in units. Approximately 29 million units were issue in lieu of management fee for FY08 versus 8.3 million units in FY07. If share price continues to remain depressed, we project a further 45 million units will be payable for FY09 and DPU will thus be at a high of 57%.

Valuation. We have revised down our gross revenue estimates for FY09F and FY10F by 12% and 13% respectively, mostly to factor in higher vacancies and forex income losses. Our DPU estimates are 4.47cents and 4.35cents. We feel risk-reward is tilted towards the former and downgrade our call from Hold to Sell. Fair value is lowered from $0.21 to $0.14.

Equity Raising Possible

FCOT results were in line with our expectations. FY08 DPU of 6.35 cts translates to a 25% DPU yield at current trading price, one of the highest in the sector. We believe current price reflects investor nervousness of near term refinancing requirements and possibility of an equity raising exercise. Until more clarity on that front, share price is unlikely to re-rate. Based on our estimates, FCOT is trading at c.17% FY09-10 yield. Maintain HOLD, TP S$0.23.

Results in line. 4Q08 distributable income was -40% yoy at S$9.3m due to increased interest expense from higher debt margins incurred in 2H08 on top of increased property expenses. FY08 distributable income came in at S$45.8m (- 3.5% yoy), pulled up by a better 1H08 performance, translating to a DPU of 6.35cts for the full year. Book NAV of S$0.97 per share as at Dec’08 reflects (i) further devaluations to Keypoint (-7%) and Cosmo Plaza (-10%) and (ii) translation losses due to a declining A$ offset by a stronger yen. As a result, gearing spikes up to 54.4%.

Adjusting FY09 DPU estimates. We lower our forward DPU estimates by 12% to reflect (i) lower than expected A$-S$ exchanged rates for FY09 (ii) tenant default at Cosmo Plaza as the main master lessee, Restoration Asset KK (60% of asset NLA) is in rental default and is not expected to contribute to earnings further. The manager has begun marketing the space and is in progress of releasing c.30% of the vacated space.

Recapitalization a likely catalyst. Given a gearing of 54.4%, FCOT is dangerously near the regulatory limit of 60%. We view that a re-rating for the stock will hinge on further details of a potential recapitalization exercise aimed at strengthening the trust’s fundamentals and resolving its ST financing needs.

FCOT may sell assets in Japan, Australia

FRASERS Commercial Trust (FCOT) may sell its assets in Japan and Australia worth over $98 million, as it restructures its portfolio following a strategic review.

The trust said this yesterday as it released results for the fourth quarter ended Dec 31, 2008. Its performance was dampened by rising borrowing costs and higher property expenses.

Net property income for the trust fell 10 per cent year-on-year to $18.6 million in Q4 08. This contributed to a 41 per cent plunge in distributable income to $9.3 million.

As a result, distribution per unit (DPU) dived 43 per cent from a year ago to 1.26 cents. This translates to an annualised DPU of 5.01 cents, and a distribution yield of 21.3 per cent based on FCOT’s closing price of 23.5 cents on Dec 31. FCOT closed 0.5 cent up at 24.5 cents yesterday.

Of its portfolio of 10 assets, FCOT is exploring the sale of Cosmo Plaza in Japan and its investment in the Allco Wholesale Property Fund (AWPF) in Australia. A strategic review which began last August concluded that these assets ‘do not meet the long term investment strategy’ of the trust, said FCOT.

After further write- downs, Cosmo Plaza and units in the unlisted AWPF were valued at $72.6 million and $26.3 million respectively as of Dec 31.

‘Divestments of these assets will be conditional upon a number of factors and appropriate updates to unitholders will be made in due course,’ FCOT said.

On top of the possible asset sales, FCOT also said that it was deferring asset enhancement plans for retail areas in KeyPoint and China Square Central under the current economic and financial market conditions.

‘Management priorities include the refinancing of the trust’s existing facilities and addressing the capital structure of FCOT,’ said Low Chee Wah, CEO of the trust manager Frasers Centrepoint Asset Management (Commercial).

‘We are studying a variety of options and will look to begin implementing them during the course of the year.’

FCOT has $624.5 million of borrowings due in one year or less, and its gearing was 54.4 per cent as of Dec 31.

For FY2008, FCOT’s net property income rose 32 per cent from a year ago to $81 million. Nevertheless, its DPU still registered a 5 per cent drop to 6.35 cents.

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.

Frasers Commercial Trust refinances short term debt