• 1QFY15 DPU jumped 20% YoY
• Growth driven by Singapore
• Raise FV and reiterate BUY

1QFY15 results met our expectations

Frasers Commercial Trust (FCOT) made a positive start to FY15, with 1QFY15 revenue and DPU increasing by 23.3% and 20.0% YoY to S$35.5m and 2.46 S cents, respectively. This was within our expectations, as the former and latter formed 25.6% and 26.0% of our full-year forecasts, respectively. The strong set of results was driven by higher income contribution from the underlying leases of Alexandra Technopark (ATP), with NPI surging 66.2% YoY to S$8.9m, following the expiry of the master lease in Aug 2014 and higher occupancy and rental rates at China Square Central (CSC) and 55 Market Street (55 MS). This was partially offset by softness in its Australian properties. Portfolio occupancy stood at 96.6% (Singapore: 97.5%; Australia: 94.9%), relatively stable from the 96.5% achieved in 4QFY14.

Expect rental reversions trend to remain robust

FCOT attained positive weighted average rental reversions of 1.2% for CSC, 16.9% for ATP and 7.1% for 55 MS in 1QFY15. CSC’s rental reversion would have been closer to 10% if not for one lease which was renewed at a lower rate. The passing rents for leases expiring in FY15 for CSC, 55 MS and ATP are approximately 22%-27%, 15%-20%, and 20% below current spot rents, respectively, based on our estimates. Hence, we expect FCOT’s robust rental reversions trend to continue in FY15. Although the situation in Australia remains challenging, we note that current passing rent of AUD610 psm per annum at its Central Park asset is still below the Perth premium Grade office average net face rents of AUD715-AUD810 psm per annum. In addition, only 0.7% of Central Park’s NLA is up for renewal for the remainder of FY15.

Maintain BUY

We believe FCOT has managed its FX and interest rate risks well, having hedged 100% of its net AUD exposure and 73% of its total borrowings. It has no refinancing needs until FY17 (S$180m) and gearing ratio of 37.2% remains manageable, in our view. Given FCOT’s resilient performance and wellhedged strategies put in place, we lower our discount rate assumption from 8.5% to 7.9%. Consequently, our fair value estimate increases from S$1.50 to S$1.65. Maintain BUY.

Source: OCBC Research - 26 Jan 2015