Frasers Commercial Trust

UOBKayhian on 17 May 2012

What’s New
· China Square Precinct Master Plan. Frasers Commercial Trust (FCOT), together with Far East Organization and The Great Eastern Life Assurance Co Ltd has unveiled the China Square Precinct Master Plan, a collaborative effort to revitalise the downtown heritage area and create a vibrant retail, entertainment and hospitality destination with a combination of old and new urban forms. The Master Plan will integrate the companies’ respective developments, namely China Square Central (CSC), Far East Square and Great Eastern Centre, into a precinct known as “China Place”.
· Enhanced connectivity. The first phase of development will feature the construction of a covered linkway connecting the three properties, as well as the future Telok Ayer MRT station. The linkway costs an estimated S$14m which will be shared equally among the three partners. This project is slated to commence in Jun 12 and targeted for completion by Feb 13.
· Hotel developments. Far East Organization is also planning two hotel developments within Far East Square. These developments comprise a 37-room designer boutique hotel that will be converted from offices within the conservation shophouses, and a new 28-storey 292-room hotel that will serve the business community in the surrounding Central Business District.

Stock Impact
· Improvements at minimal cost. In our view, this initiative is likely to benefit CSC by improving its connectivity and integration with Telok Ayer MRT as well as adjoining developments Far East Square and Great Eastern Centre. We estimate that FCOT will need to invest less than S$10m for the construction of the proposed linkway, which we expect will be funded through internal sources.
· Room to improve occupancy and tenant mix. Our previous site visit to CSC’s retail space suggests potential to improve occupancy and tenant mix. Channel checks revealed that there are a few unoccupied units on the ground floor, while tenant mix at the basement is too broad, which includes a gym, low-end eateries, a Christian bookstore, a laundry and a redemption fulfilment centre among others. In addition, the retail podium lacks strong anchor tenants to draw and retain shoppers.
· Revitalisation of Tanjong Pagar and Shenton Way. We believe that CSC could also benefit from the revitalisation of Tanjong Pagar and Shenton Way that includes new offices and residential developments. CSC houses the nearest supermarket to upcoming residential developments such as Robinson Suites and One Shenton, ParkRoyal on Pickering, and a new hotel due to be completed by end-12.

Earnings Revision.
· No change to forecast. We maintain our profit forecast.

Valuation
· Re-iterate BUY with target price of S$1.07 (no change), implying 15.7 % upside from the current price and FY13 DPU yield of 8.2%. Our target price is based on an 8.7% discount rate and long-term growth rate of 2.0%.