Wednesday, October 2, 2013

Frasers Commercial Trust: On accelerated growth mode (OCBC)

Frasers Commercial Trust:
Fair value S$1.45
add: 12m dividend forecast S$0.079
versus: Current price S$1.26

On accelerated growth mode
• Uplift from interest and distribution savings
• Higher secured rentals expected
• Positive leasing activity in 3Q13

Frasers Commercial Trust (FCOT) has essentially locked in robust growth for FY14 with lower interest costs and the redemption of its 321.9m Series A Convertible Perpetual Preferred Units (CPPUs) this year. In addition, we expect FCOT to gain from its growth initiatives embarked over the past year.
For one, FCOT has completed the Precinct Master Plan and asset enhancement works for the office tower at China Square Central, and is likely to benefit from improved occupancy and higher secured rentals going forward. Moreover, FCOT has successfully completed the renewal of 511,000 sqft of the underlying leases at Alexandra Technopark and has achieved positive rental reversion of 17.4% at the property. According to the latest report by DTZ, we also note that sequential rental increments were seen within the CBD in 3Q13 on the back of better occupancy rates. This is consistent with our view that office leasing activity is likely to remain healthy. We maintain our BUY rating on FCOT with a revised fair value of S$1.45 (S$1.58 previously).

Boost from CPPU redemption
Frasers Commercial Trust (FCOT) has essentially locked in robust growth for FY14 with lower interest costs and the redemption of its 321.9m Series A Convertible Perpetual Preferred Units (CPPUs) this year. On 4 Sep, FCOT announced that 11.1m CPPUs will be converted into 9.4m new ordinary units at a conversion price of S$1.1845 apiece. With virtually no further burden from CPPU distribution (only 1.1m CPPUs left in issue), FCOT is set to achieve another strong set of results in the coming year. As a recap, FCOT turned in a 28.5% YoY growth in 2Q13 DPU as a result of distribution savings from partial CPPU redemption. This far surpasses the DPU growth of -4.7% to 1.5% seen by its office peers.

Other growth initiatives executing well
Apart from being buoyed by CPPU redemption, we also expect FCOT to gain from its growth initiatives embarked over the past year. For one, FCOT has completed the Precinct Master Plan and asset enhancement works for the office tower at China Square Central, and is likely to benefit from improved occupancy and higher secured rentals going forward. In addition, FCOT has successfully completed the renewal of 511,000 sqft of the underlying leases at Alexandra Technopark ahead of expiry in FY14-15. This not only allows FCOT to achieve positive rental reversion of 17.4% at the property but also to improve its lease expiry profile.

Improvement in industry datapoints
In our S-REITs sector report dated 9 Sep 2013, we note that office rents were flat in 2Q13 after seeing moderating rates of decline over the past few quarters, hence leading us to believe that the office market may just be on the cusp of recovery. According to the latest report by DTZ, sequential rental increments of 1.3%-3.4% were indeed seen within the CBD in 3Q13 on the back of better occupancy rates. This is consistent with our view that office leasing activity is likely to remain healthy. We maintain our BUY rating on FCOT, but to reflect the higher risk-free rate and beta on FCOT, we trim our fair value from S$1.58 to S$1.45.


Source/Extract/Excerpts/来源/转贴/摘录: OCBC-Research,
Publish date: 30/09/13

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