Frasers Commercial Trust

UOBKayhian on 26 June 2012

Price $0.965
Target $1.08

What’s New
· Re-iterate BUY with higher target price of S$1.08 (previously S$1.07), implying 11.9% upside from current price.
· Refinances S$500m term loan. Frasers Commercial Trust (FCOT) has entered into: a) a S$320m, three-year transferable term loan facility with interest rate pegged to the Singapore Swap Offer Rate (SOR) plus a margin of 1.55% p.a., and b) a S$185m, five-year transferable term loan facility with interest rate pegged to SOR plus a margin of 1.83% p.a. (excluding upfront costs). The new facilities will be primarily used to refinance FCOT’s existing S$500m term loan facility, which is yielding 2.65% p.a. above SOR.

Stock Impact
· Interest savings exceed expectation. Following the refinancing exercise, we expect an approximate 100bps interest cost reduction on FCOT’s Singapore dollar-denominated term loans, higher than previously expected. All-in financing cost for the group’s Singapore dollar-denominated debt is expected to fall from about 3.6% to about 2.6%.
· Reduced refinancing risk. FCOT has successfully spread out its debt maturity profile by entering into three- and five-year term loans, effectively reducing refinancing risk. Prior to refinancing, all of its debt was structured to mature at the same time.
· To redeploy S$360m from KeyPoint divestment. FCOT will be looking to redeploy S$360.0m of proceeds from the divestment of KeyPoint, subject to the approval of unit-holders at an upcoming EGM. In our view, FCOT could: a) acquire Alexandra Point or Valley Point from its sponsor, valued at S$162m and S$195m respectively, or b) redeem the convertible perpetual preferred units (CPPUs), which are yielding 5.5% p.a..
· Revitalisation of China Square Central. FCOT, together with Far East Organization and The Great Eastern Life Assurance Co Ltd has unveiled a collaborative effort to revitalise the area surrounding China Square Central (CSC). We believe this initiative is likely to improve CSC’s connectivity with Telok Ayer MRT as well as adjoining developments Far East Square and Great Eastern Centre.

Earnings Revision.
· Raised DPU forecast. We have raised our FY13F DPU forecast by 1.3% to account for higher-than-expected interest savings arising from the refinancing exercise.

Valuation
· Re-iterate BUY with higher target price of S$1.08 (previously S$1.07), implying 11.9% upside from the current price and FY13 DPU yield of 8.0%. Our target price is based on an 8.7% discount rate and long-term growth rate of 2.0%.