Frasers Commercial Trust

UOBKayhian on 29 Oct 2012

Results

·      Results in line. Frasers Commercial Trust (FCOT) reported 4QFY12 DPU of 1.75 S cents/ unit, up 15% yoy and in line with our forecast. 4QFY12 gross revenue was S$35.6m, up 17% yoy, due to higher revenue recognised from China Square Central (CSC) following the expiry of the master lease and higher contribution from Caroline Chisholm Centre (CCC) due to the completion of the other 50% interest in the property. 4QFY12 net property income (NPI) was S$26.5m, up 9% yoy due to higher income contribution from Central Park and CCC, slightly offset by lower income from CSC and Galleria Otemae.

·      Divests Japanese assets. FCOT has entered into a share transfer agreement with Yugen Kaisha Aoyama Sogo Accounting Office for the sale of 100% of the issued and outstanding shares of Frasers Commercial Tozai No.2 TMK (Tozai TMK) for JPY2 (less than S$1). Tozai TMK wholly-owns three properties in Japan, namely Galleria Otemae Building, Azabu Aco Buildingand Ebara Techno-Serve Headquarters Building.

Stock Impact

·      Japanese assets contributed 5.6% of NPI. The Japanese assets were divested as they no longer meet the long-term investment strategy of FCOT. Going forward, FCOT will exit from the Japan market and will focus primarily on the Singapore andAustralia markets. In 4QFY12, the three Japanese assets contributed 5.6% of FCOT’s total NPI. Based on FCOT’s financial statements as at 30 Sep 12, gearing will be reduced from 36.8% to 33.7% post divestment.

·      Partial debt repayment. Following the completion of the sale of KeyPoint, S$159.5m, or 44.6% of the total net proceeds of S$357.8m has been utilised to partially repay FCOT’s Singapore dollar- and Australian dollar-denominated term loans. We forecast expect FCOT’s gearing to decrease from 36.8% in FY12 to 33.1% in FY13.

·      CPPU redemption on the cards? In our view, FCOT could utilise the remaining S$198.3m from the sale of KeyPoint to partially redeem outstanding convertible perpetual preferred units (CPPUs), which are yielding 5.5% p.a.. 

Earnings Revision

·      Increased DPU forecast. We have increased our FY13F DPU forecast by 1.3% to 7.7 S cents. We have factored in interest savings from a partial redemption of CPPUs, which is offset by a decline in NPI due to the divestment of the Japanese assets.

Valuation

·      Re-iterate BUY with higher target price of S$1.35 (previously S$1.17), implying 12.5% upside. We reduce our required rate of return by 50bp from 8.2% to 7.7%, due to yield compression in the S-REIT sector and improving office dynamics.