Frasers Commercial Trust

OCBC on 7 Sept 2012

Frasers Commercial Trust (FCOT) announced that it has not exercised its right to redeem the Series A Convertible Perpetual Preferred Units (CPPUs). However, CPPU holders had successfully exercised their right to convert ~1.0m CPPUs at a conversion price of S$1.1845 per unit. We note that 878,697 new ordinary units will be issued on 1 Oct through the conversion process and ~341.5m CPPUs will be left in issue post conversion. We are currently maintaining our view that FCOT will likely redeem half of its CPPUs as the distribution rate is relatively high at 5.5% of its offer price. In view of the CPPU conversion, we now factor in the new ordinary units into our model. Our fair value, however, remains unchanged at S$1.23. Maintain BUY on FCOT.

Update on CPPU conversion and redemption
Further to the expiry of the restriction period for redemption and conversion of Series A Convertible Perpetual Preferred Units (CPPUs) on 25 Aug, Frasers Commercial Trust (FCOT) announced that it has not exercised its right to redeem the CPPUs. However, CPPU holders had successfully exercised their right to convert ~1.0m CPPUs at a conversion price of S$1.1845 per unit. We understand that 878,697 new ordinary units will be issued on 1 Oct through the conversion process (0.14% of total units outstanding as at 30 Jun), but they will not be entitled to any distributions on FCOT’s ordinary units declared during the period between 1 Apr and 30 Sep. We estimate that ~341.5m CPPUs will be left in issue post conversion.

KeyPoint sale proceeds likely used to redeem CPPUs
We are currently maintaining our view that FCOT will likely redeem half of its CPPUs as the distribution rate is relatively high at 5.5% of its offer price. The divestment of KeyPoint is expected to be completed by 8 Oct, and will provide FCOT the financial resources to redeem the CPPUs as well as pare down its existing borrowings. As a reference, FCOT had proposed on 24 Apr to sell KeyPoint for a consideration of S$360m, representing a 26.3% premium to its latest valuation of S$285m. This is expected to result in a gain of S$72.8m.

Maintain BUY with unchanged fair value of S$1.23
In view of the CPPU conversion, we now factor in the new ordinary units into our model. Our fair value, however, remains unchanged at S$1.23. We continue to like FCOT for its growth potential, strong execution and attractive P/B of 0.88x. Based on our understanding, FCOT may possibly be in the final stages of discussion with potential tenants to take up most of the remaining 85% space formerly occupied by Marsh & McLennan at China Square Central. This, together with potential interest savings, may likely translate to better financial performance at FCOT’s portfolio going forward. Maintain BUY.