Frasers Commercial Trust

OCBC on 13 June 2012

Frasers Commercial Trust (FCOT) has emerged as the top performer in the S-REIT space YTD given its expected improvement in operating performance and financial position. The acquisition of the remaining 50% stake in Caroline Chisholm Centre and asset enhancement initiative on China Square Central, for example, are expected to contribute positively to its DPU. We also see several positives from the proposed divestment of KeyPoint, which are derived from using the proceeds to pare down its borrowings. We continue to like FCOT for its growth potential, proactive management and respectable FY12F DPU yield of 7.3%. Amid the positive outlook, we expect FCOT’s performance to be sustained (valuations still undemanding at 0.7x P/B). We are currently holding off adjusting our estimates as the divestment of KeyPoint is subject to unitholders’ approval. Maintain BUY with unchanged fair value of S$0.97.

Outperformer in S-REIT space
Frasers Commercial Trust (FCOT) has emerged as the top performer in the S-REIT space YTD given its expected improvement in operating performance and financial position. The REIT’s acquisition of the remaining 50% stake in Caroline Chisholm Centre in Australia, which had been completed on 13 Apr, is expected to contribute positively to its DPU and strengthen its portfolio lease expiry profile. In mid-May, FCOT jointly announced the China Square Precinct Master Plan with Far East Organization and The Great Eastern Life Assurance, which will enhance the traffic and connectivity of the downtown heritage area, including China Square Central (CSC). This will likely enable FCOT to better position CSC for quality tenants and ultimately benefit from yield optimization, now that FCOT has taken over management of the asset following the expiry of master lease.

Divestment of KeyPoint a plus
FCOT had also announced the proposed sale of KeyPoint on 24 Apr, much to the market’s anticipation. The sales consideration was at S$360.0m and represents a 26.3% premium over the property’s latest valuation of S$285.0m (NPI yield at 3.11%). We see several positives from the divestment, especially when the proceeds are used to pare down its borrowings or even redeem its CPPUs (Convertible Perpetual Preferred Units). First, it is expected to alleviate the heat on its aggregate leverage (currently close to 40%), hence providing it with greater financial flexibility for future investment opportunities. Second, FCOT may be able to refinance its debts at more favourable terms, as its financial position is now stronger. Furthermore, interest expenses are likely lower from lower outstanding debts.

Maintain BUY
We continue to like FCOT for its growth potential, proactive management and respectable FY12F DPU yield of 7.3%. Amid the positive outlook, we expect FCOT’s performance to be sustained (valuations still undemanding at 0.7x P/B). We are currently holding off adjusting our estimates as the divestment of KeyPoint is subject to unitholders’ approval. Maintain BUY with unchanged fair value of S$0.97.