Continues to strengthen
Frasers Commercial Trust (FCOT) ended FY13 with a stellar set of results. We expect it to continue to grow organically in FY14 as some of its leases are at below-market rates and the outlook for the office market is positive.
As FCOT continues to expand its presence in Australia (currently accounting for c.53% of its total NPI), we factor in the risk premium of the Australian market into our model. As a result, our DDM-based (discount rate: 8.9%) target price falls to S$1.39. Under our revised rating structure, our recommendation changes from Outperform to Add.
Ended the year with stellar results
FCOT ended FY13 with a stellar set of results with DPU rising 18.8% yoy to 2.08S¢. These results were mainly attributed to the higher income from the additional 50% interest in Caroline Chisholm Centre, higher rental rates, lower interest costs and most importantly, the redemption and conversion of 330.3m Series A convertible perpetual preferred units (CPPU) in FY13. We expect this redemption to continue to benefit the unitholders in FY14 as FCOT enjoyed a full-year contribution from the CPPU savings.
Increasing exposure in Australia
Although FCOT is fundamentally growing stronger, Australia makes up a steadily increasing portion of its portfolio. As at end-4QFY13, c.53% of FCOT‟s earnings were attributable to the assets in Australia. Given that the risk premium in Australia is different than in Singapore, we adjust our discount rate using a geographical NPI weighted average assumption. As a result, our discount rate for FCOT increases from 8.4% to 8.9%.
Although the risk premium in Australia is higher, the exposure to Australia has allowed FCOT to enjoy a relatively longer weighted average lease expiry (WALE) of 4.6 years - above the Singapore office market average of 3-4 years.
Continued growth expected
We continue to favour the stock due to the positive outlook for the Singapore office market and a possible expansion of its books as a result of the 16,000 sq m hotel site at China Square Central.
Publish date: 29/11/13