Frasers Commercial Trust

UOBKayhian on 26 Jul 2012

Results
· Results in-line. Frasers Commercial Trust (FCOT) reported 3QFY12 DPU of 1.70 S cents/share, (+23% yoy, -2.3% qoq) in line with our forecast. Gross revenue was up 17% yoy to S$35.7m, while net property income (NPI) rose 7% yoy to S$26.6m due to an increased stake in Caroline Chisholm Centre (CCC) and higher contribution from China Square Central (CSC) following the end of its master lease agreement in early-12.
· WALE lengthened. Following the increased stake in CCC, FCOT’s weighted average lease expiry (WALE) has increased from 3.4 years in 2QFY12 to 4.2 years.
· CSC lease renewals on track. Several major CSC tenants have renewed their leases in 3QFY12, such as Cerebos Pacific, WT Partnership, Wavecell and Wen & Weng Medical Group. FCOT is also in discussions with several potential tenants to take up 72,000sf of space vacated by Marsh & McLennan. Currently, 24.4% of CSC’s leases by gross rental will be expiring in FY12, down from 31.3% in 2QFY12.
Stock Impact
· Minimal impact from potential CPPU conversion. FCOT has 342.5m outstanding convertible perpetual preferred units (CPPU) issued at S$1.00 with yield of 5.5% p.a.. After 26 Aug 12, a) CPPU holders have the right to convert CPPUs into ordinary FCOT units at a ratio of 1 CPPU: 0.844 units and b) the manager of FCOT will also have the right to redeem any number of units at S$1.00. Assuming full conversion by CPPU holders, our FY13 DPU estimate will decline by 4.6%. However, we deem this unlikely as about 90% of the CPPUs are held by a subsidiary of the sponsor.
· DPU uplift from capital redeployment. FCOT will realise S$360m in cash following the sale of KeyPoint and we see further DPU uplift from capital redeployment. In our view, FCOT could deploy the cash to a) repay debt, b) acquire an asset, c) redeem CPPUs, or d) buyback units. We have assumed debt repayment in our model, which is the most conservative option. Please refer to next page for the DPU and target price impact under each scenario.
· Further room for yield compression. Yield compression has taken place against a backdrop of low interest rates, with REIT yields declining 146bp ytd to 6.48% and 10-year Singapore dollar government yields declining 30bp ytd to 1.33%. Going forward, we see further room for REIT yields to compress given that the spread between REITs and government bonds is still 135bp above the historical long-term spread of 3.80%. Yield compression to the long-term spread implies a further 36% upside for REITs.
Earnings Revision
· Tweaked forecast. We tweaked our DPU forecast marginally to account for higher-than-expected gross rent and interest expense.
Valuation
· Re-iterate BUY with higher target price of S$1.17 (previously S$1.08), implying an 8.8% upside. We reduce our required rate of return by 50bp from 8.7% to 8.2%, accounting for further yield compression, and maintain the long-term growth rate at 2.0%.