Another milestone attained

• Secured refinancing for all debts
  
• Positive growth prospects intact
  
• Still attractively priced
  

Refinancing of all loan facilities

Frasers Commercial Trust (FCOT) announced earlier this week that it has entered into agreements with a club of banks for transferable term loan facilities of S$545m and A$135m to refinance its entire existing borrowings. While the interest rates are likely to be comparable, we view this as a major positive move given that all the new facilities will be unsecured and that the debt maturity profile will be significantly enhanced. Specifically, we expect FCOT’s unencumbered asset ratio to improve from c. 20% to 100% and its average debt duration to be extended to 4.3 years from c. 1.4 years as at 30 Jun following the drawdown of the new facilities (expected before 30 Sep).

Expecting robust rental growth

For the year ahead, we remain positive on FCOT’s performance. Apart from benefitting from the recovery in the Singapore office market, we note that the master lease at Alexandra Technopark (ATC) has expired last month and that FCOT is poised for strong rental uplift with the direct management of the property. Based on our projections, there may be 24% gap between the underlying passing rent and master lease rent. As ATC contributed a significant 23.3% to FCOT’s 3QFY14 NPI, we believe the rental growth in FY15 is likely to be material. This, we note, is in addition to the improved performance at China Square Central, which enjoyed higher leasing demand after its asset enhancement initiatives and the opening of Telok Ayer MRT station.

Maintain BUY

FCOT is currently trading at 0.88x P/B, lower than the S-REITs sector average of 1.01x P/B. We believe FCOT is likely to see a net revaluation gain for its portfolio assets when it reports its FY14 results in Oct, thus making it more attractive relative to its listed peers. Forward yield is also compelling at 7.2% in our opinion. We maintain BUY with unchanged fair value of S$1.48 on FCOT.

Further growth ahead

• 3QFY14 DPU flat YoY
  
• Robust leasing activity
  
• Strong rental uplift likely at ATC
  

3QFY14 results mostly in line

Frasers Commercial Trust (FCOT) reported a consistent set of 3QFY14 results last evening. NPI came in marginally lower by 0.7% YoY at S$22.9m, due to the effects of the weakening AUD on the income of FCOT’s Australia properties and higher repair and maintenance expenses for Caroline Chisholm Centre. However, FCOT continued to benefit from savings from its convertible perpetual preferred unit (CPPU) distribution, which led to a 2.9% YoY increase in distributable income. On the back of a larger unit base, DPU stood flat YoY at 2.19 S cents. This brings the 9MFY14 DPU to 6.29 S cents (+9.2%), forming 71.8%/70.7% of our/consensus FY14 distribution forecasts.

Robust underlying performance

We note that leasing activity has remained very robust during the quarter. In Singapore, positive rental reversions ranging from 10.7% to 11.5% were achieved for leases commenced in 3Q, while occupancy rate improved 0.5ppt QoQ to 98.4%. Notably, the office tower at China Square Central attained 100% committed occupancy as it continued to benefit from its recent asset enhancement initiatives and better connectivity with the opening of Telok Ayer MRT station. In Australia, occupancy also inched up by 0.3ppt to 97.3%, whereas an 87.0% jump in secured rents was registered at Central Park following the replacement of a long lease contracted more than 10 years ago with a new tenant. As a result, portfolio occupancy rose to 98.0% from 97.5% in 2Q, and only 2.7% of the remaining portfolio leases will be expiring for FY14.

Maintain BUY

Looking ahead, FCOT shared with us that it will continue to focus on maintaining the high occupancy rates across the portfolio and refinancing its maturing debts. It also reiterated that the upcoming expiry of the master lease at Alexandra Technopark (ATC) in Aug 2014 will further boost the portfolio performance as the average underlying gross rent is twice the net rent received under the master lease. We make some adjustments to our forecasts to reflect a firmer portfolio going forward. Our fair value is raised marginally from S$1.45 to S$1.48. Maintain BUY on FCOT.

Room for further organic growth

Frasers Commercial Trust (FCOT) has just announced its 2QFY9/14 results, posting a drop of 3.7% yoy in revenue but a gain of 3.2% in DPU. Its 2QFY14 earnings were in line, with both revenue and DPU accounting for 24% of our full-year estimates. 1H DPU made up 48% of our full-year forecast. The higher DPU was mainly attributed to the savings from the buyback of convertible perpetual preferred units (CPPU) in FY13. We maintain our Add rating, with an unchanged DDM-based (discount rate: 8.8%) target price of S$1.39. Positive catalysts could come from organic growth and the potential sale of the hospitality site at China Square Central.

Weak Australia portfolio vs. strong Singapore assets

During 2QFY14, both gross revenue and NPI decreased to S$28.6m (-3.7% yoy) and S$21.7m (-5.8% yoy), respectively. Although FCOT’s topline was lower, DPU continued to grow by 3.2% yoy. The stronger DPU was mainly attributed to the redemption of CPPU and the better performance in China Square Central, which was partially offset by the weaker Australian dollar, lower occupancy for Central Park and higher expenses for the Caroline Chisholm Centre due to painting works undertaken. During the quarter, its Singapore portfolio continued to achieve better performances with a higher NPI of 5.7% on the back of strong rental reversion ranging from 6.4% to 18.2%.

Stable portfolio with potential organic growth

The occupancy for the trust grew to 97.5% (vs. 95.3% a year ago) while the leverage ratio remained at a manageable level of 37.8%. For FY14, we expect additional contribution from China Square Central as the property continues to benefit from the completed AEI and the new Telok Ayer MRT station. In addition, Alexandra Technopark is expected to post good organic growth when the master lease expires in Aug 14. With only 3.9% of leases (as a percentage of gross rental income) up for renewal in FY14 and 7.0% in FY15, we expect the occupancy to remain stable while earnings continue to grow organically on the back of built-in step-up rents (2.9-4.7% p.a.) for more than 41% of total leases.

We maintain an Add rating

FCOT offers a 6.8% FY14 dividend yield and a 5.1% NPI yield. Compared to the sector average of 6.0% and 4.2%, respectively, we continue to see value in FCOT and maintain our Add rating with an unchanged target price of S$1.39.

Sound underlying performance

• 2QFY14 DPU up 3.0% YoY
  
• Singapore assets to continue to deliver
  
• Weakness in AUD may persist
  

2QFY14 scorecard largely in line

Frasers Commercial Trust (FCOT) reported 2QFY14 gross revenue of S$28.6m, down 3.7% YoY due to a weaker AUD and lower occupancy at Central Park. NPI dropped 5.8% to S$21.7m, further impacted by higher expenses due to painting works undertaken at Caroline Chisholm Centre. On a cash basis, however, NPI would only be marginally lower by 0.5% at S$21.0m. We note that cash flows from the Australian properties were hedged via forwards and AUD-denominated loans. Over the quarter, FCOT also continued to enjoy savings from its convertible perpetual preferred units (CPPU) distribution. As a result, distributable income and DPU rose by 5.6% and 3.0% YoY to S$13.8m and 2.05 S cents, respectively. We deem the results to be largely within view, as 2HFY14 DPU met 46.1%/47.1% of our/consensus full-year DPU forecasts.

Robust leasing activities

Expectedly, China Square Central (CSC) continued to bolster FCOT’s performance, raking up 14.5% growth in NPI amid higher occupancy and rental rates. This has helped to mitigate the softer showing at its Australian properties, which saw a 15.5% fall in NPI. Nevertheless, portfolio occupancy stayed at a high 97.5% (1Q: 97.1%). Leasing activities, particularly in Singapore, also remained robust, as 286,372 sqft or a sizable 12.6% of FCOT’s portfolio NLA, were committed, leased and renewed in the quarter. In addition, rental reversions ranging from 6.4% to 18.2% were achieved for the Singapore properties, reinforcing our view for a firm recovery in the domestic office rental market.

Maintain BUY

Looking ahead, we remain positive on FCOT’s Singapore portfolio, as CSC is expected to continue to benefit from its asset enhancement works and better connectivity with the opening of Telok Ayer MRT station, while Alexandra Technopark is likely to see meaningful rental uplift upon the master lease expiry in Aug. For its Australian assets, we believe the income may continue to suffer from weaker AUD, based on Bloomberg consensus forecasts. As such, we are making minor adjustments to our forecasts to factor in the potential weakness; but there is no change to our fair value of S$1.45. Maintain BUY.

Growth catalysts in sight

• Boost from CPPU distribution savings
  
• Office rents to see continued growth
  
• Rental uplift upon master lease expiry
  

Still benefitting from CPPU distribution savings

Frasers Commercial Trust (FCOT) recently delivered a strong set of 1QFY14 results, with DPU jumping 29.7% YoY to 2.05 S cents on the back of distribution savings from its convertible perpetual preferred units (CPPUs). While FCOT’s DPU growth is likely to moderate going forward given that the net conversion/redemption of the CPPUs commenced in 2QFY13, we expect FCOT to continue to benefit from the positive flow-through on its DPU for the rest of FY14. On 5 Mar 2014, FCOT announced that an additional 53,465 CPPUs will be converted into 45,133 new ordinary units in FCOT following the exercise of conversion right by CPPU holders (leaving 178,479 CPPUs outstanding). As such, we believe further upside for FCOT’s DPU is possible, as the distribution savings from the CPPUs continue to outweigh the impact of an enlarged unit base.

Industry outlook looking rosy

Operationally, we are also positive on FCOT’s performance. We note that its portfolio assets are currently under-rented, and that the existing vacant spaces are expected to place FCOT in a good position for further income growth. According to CBRE MarketView report, leasing activity in the office market had witnessed a significant uptick in 4Q13, resulting in healthy net absorption and a broad-based drop in vacancy rates across the various sub-markets. This pushed the average rents for both Grade A and Grade B office spaces up 2.1% QoQ to S$9.75 and S$7.25 psf pm, respectively. For the next two years, CBRE anticipates continued rental growth in the office market amid limited office supply and tightening of available office space. We see FCOT as the beneficiary of this potential market upturn, in view of its exposure to the Singapore office space.

Maintain BUY

Come Aug 2014, the master lease at Alexandra Technopark will expire and FCOT will be taking over direct management of the property. As FCOT is currently receiving S$1.80 psf pm net rent for the master lease vs. S$3.40 gross rent for underlying leases, the property is also well positioned for strong rental uplift. Based on its last price, FCOT is trading at undemanding P/B of 0.81x and offers a compelling FY14F yield of 7.1%. We maintain BUY and S$1.45 fair value on FCOT.