Frasers Commercial Trust: Solid Portfolio But Short On Growth Drivers
(Neutral, SGD1.34, TP: SGD1.43)
FCOT reported a 3QFY13 distribution per unit (DPU) of 2.19 cents (+28.8% y-o-y) which, along with its 1HFY13 DPU of 3.57 cents, account for 43.8% of our full-year forecast. Although DPU is expected to continue to grow through 4Q13 after the redemption of c. 96% of its CPPUs in 1HFY13, we downgrade FCOT to NEUTRAL in view of rising potential risks, but with a slightly higher DDM-based TP of SGD1.43.
DPU growth mainly due to CPPU redemption. During the quarter, Frasers Commercial Trust (FCOT)’s gross revenue fell 16.1% as a result of the divestment of KeyPoint and its Japanese properties. However, it was able to post stellar DPU growth, mainly due to the redemption of convertible perpetual preferred units (CPPU) which cost the REIT an average 5.5% annually at the distribution level. With c. 95.8% of all the CPPUs originally issued in 1HFY13 being redeemed, the number of available CPPUs has come down significantly. As a result, we expect FCOT’s DPU to grow through the next few quarters.
Renewing master lease for Alexandra Technopark. During the quarter under review, leases for c. 511,000 sq ft at Alexandra Technopark (due to expire in FY14 and FY15) were renewed. These leases, which are under a master lease, have now been extended to FY16 and FY18. This effectively lowers FCOT’s FY14 lease expiry profile from 27.7% to 7.1%, while at the same time achieving a positive rental reversion of 17.4%.
Strong occupancy but limited room to grow. We expect to see continuous growth in: i) revenue via the built in step-up rentals within the company’s portfolio (c. 39%), and ii) the occupancy rate of China Square Central (currently at 91.7%). However, the lack of future acquisition targets, the relatively high gearing of 39.5% together with rising currency risks (as c. 52% of FCOT’s total net property income comes from its Australian assets) will limit the growth prospects of this REIT. At this juncture, in view of the lack of clear growth drivers, we are downgrading our rating on FCOT to Neutral, but with a slightly higher DDM-based (COE: 7.3%; TGR:2.0%) TP of SGD1.43.
Publish date: 25/07/13