STI : 3,133.74
Price Target : 12-Month S$ 1.46
Awaiting the year-end kicker
• Strong start to 1Q14 with a DPU of 2.05 Scts
• Bonus kicker from Alexandra Technopark master lease
• BUY, TP SS$1.46
1Q14 DPU of 2.05 Scts is in line. Frasers Commercial Trust (FCOT) reported a 3% and 4% y-o-y decline in gross revenue and NPI to S$28.8m and S$22.1m respectively.
The slight dip in performance mainly came from a weaker AUD-SGD exchange rate and slightly lower occupancy at Central Park property (93.3%), which was offset by higher rentals achieved for its Singapore properties. China Square Central (CSC) performed strongly following the refurbishment of its office tower, which saw rental reversions/new leases signed at c.20% above preceding levels. In addition, interest savings from a lower loan quantum, lower CPPU distributions after redemption and hedging gains (AUD-S$) resulted in a 33% y-o-y uplift in distributions to S$13.7m (DPU of 2.05 Scts, + 30% y-o-y).
Lowering its fees paid in units. We also note that the manager paid a lower portion of their fees in units (20% of mgmt fees vs 80% a year ago), which will result in lower DPUs. This is a positive move in our view, as it narrows the gap between EPU/DPU, minimizing dilutions going forward. Our estimates are adjusted slightly downwards to account for this change.
Strong income visibility; risk of AUD-S$ is mitigated through forward hedges. FCOT continues to offer strong earnings visibility for FY14F. Its rental income is also supported by a long weighted average lease expiry of 4.4 years, with underlying occupancy holding steady at 97%. Come FY14, FCOT will only renew 6.2% of its income, a majority coming from China Square Central and Central Park. We see minimal risks to earnings, as expiring rent levels are c.10-15% lower than current market rents in Singapore and Australia. FCOT attempts to minimise the volatility of its income from Australia through forward hedges.
Looking forward to Alexandra Technopark’s (ATP) master lease expiry in Aug’14 (4QFY14). The expected expiry of the master-lease offers a significant upside to FCOT’s distributions come Aug’14. Underlying occupancies for the property remain high at 96.4% and given the positive spread between underlying passing rentals (S$3.40 psf pm) vs implied master lease rent levels (estimated at a gross rent of S$2.90 psf pm), we estimate earnings growth to accelerate by 9.0% come FY15F.
Lock in those yields! BUY, TP S1.46. At a FY14-15F CAGR of 7.0%, FCOT continues to offer one of the strongest growth profiles among its S-REIT peers. FY14-15F prospective yields of 6.6%-7.2% remain attractive. Maintain BUY with a revised TP of S$1.46.
Publish date: 24/01/14