Frasers Commercial Trust

CIMB RESEARCH on 6 March2013

MANAGEMENT has announced the successful redemption of a further 157.1 million of its remaining convertible perpetual preferred units (CPPUs). This round of redemption constitutes 92 per cent of the remaining units, and 46 per cent of the original issuance. The number of remaining CPPU units is about 14.3 million. The redemption will be funded via bank borrowings and internal resources.

Key positives come from:

• the immediate distribution per unit (DPU) boost and
• the avoidance of overhang and dilution from a conversion by CPPU holders.

While this decision could indicate a lack of even more accretive use of funds in the near term, this is perhaps unsurprising given the high hurdle posed by the 5.5 per cent yield on the CPPU and the elevated asset values currently in the market. The key downside, however, comes from a higher resultant asset leverage of about 39 per cent.

This could limit debt headroom and opportunities to acquire and improve its overall portfolio quality. That said, we continue to see organic growth for FCOT through a relook of hotel redevelopment plans at China Square Central, upside from back-filling at China Square Central and direct management of Alexandra Technopark after the master lease lapses.

Maintain "outperform" on attractive yields of 6-7 per cent, and catalysts from further yield-enhancing activities.

OUTPERFORM