• Boost from CPPU distribution savings
• Office rents to see continued growth
• Rental uplift upon master lease expiry

Still benefitting from CPPU distribution savings

Frasers Commercial Trust (FCOT) recently delivered a strong set of 1QFY14 results, with DPU jumping 29.7% YoY to 2.05 S cents on the back of distribution savings from its convertible perpetual preferred units (CPPUs). While FCOT’s DPU growth is likely to moderate going forward given that the net conversion/redemption of the CPPUs commenced in 2QFY13, we expect FCOT to continue to benefit from the positive flowthrough on its DPU for the rest of FY14. On 5 Mar 2014, FCOT announced that an additional 53,465 CPPUs will be converted into 45,133 new ordinary units in FCOT following the exercise of conversion right by CPPU holders (leaving 178,479 CPPUs outstanding). As such, we believe further upside for FCOT’s DPU is possible, as the distribution savings from the CPPUs continue to outweigh the impact of an enlarged unit base.

Industry outlook looking rosy

Operationally, we are also positive on FCOT’s performance. We note that its portfolio assets are currently under-rented, and that the existing vacant spaces are expected to place FCOT in a good position for further income growth. According to CBRE MarketView report, leasing activity in the office market had witnessed a significant uptick in 4Q13, resulting in healthy net absorption and a broad-based drop in vacancy rates across the various submarkets. This pushed the average rents for both Grade A and Grade B office spaces up 2.1% QoQ to S$9.75 and S$7.25 psf pm, respectively. For the next two years, CBRE anticipates continued rental growth in the office market amid limited office supply and tightening of available office space. We see FCOT as the beneficiary of this potential market upturn, in view of its exposure to the Singapore office space.

Maintain BUY

Come Aug 2014, the master lease at Alexandra Technopark will expire and FCOT will be taking over direct management of the property. As FCOT is currently receiving S$1.80 psf pm net rent for the master lease vs. S$3.40 gross rent for underlying leases, the property is also well positioned for strong rental uplift. Based on its last price, FCOT is trading at undemanding P/B of 0.81x and offers a compelling FY14F yield of 7.1%. We maintain BUY and S$1.45 fair value on FCOT.

Source: OCBC Research - 11 Mar 2014