• QFY16 DPU rose 2.0% YoY
• Some pressure on occupancy rates
• Valuations still attractive

1QFY16 results met our expectations

Frasers Commercial Trust (FCOT) reported its 1QFY16 results which came in within our expectations. Gross revenue jumped 11.7% YoY to S$39.6m and formed 24.8% of our FY16 projection. This was underpinned by higher income from Alexandra Technopark (ATP) and a full quarter contribution from 357 Collins Street which was acquired on 18 Aug 2015, but partially offset by lower revenue from its other assets. Correspondingly, FCOT’s NPI grew 15.5% YoY to S$29.4m, aided by a higher NPI margin of 74.1% (+2.4 ppt). DPU increased at a slower pace of 2.0% to 2.51 S cents due to higher finance costs and an enlarged unit base. This made up 25.5% of our full-year forecast.

Occupancy declined to 92.9%

FCOT’s lower YoY gross revenue from China Square Central (CSC) and 55 Market Street was attributed largely to lower occupancy rates. We believe this is a reflection of the more challenging leasing environment, which resulted in the non-renewals of some leases (largely retail leases for CSC).

Occupancy at Central Park (CP) dipped from 88.6% in 4QFY15 to 80.3% due to weaker demand in Perth, but a silver lining is that CP only has one lease expiring for the remainder of FY16 (0.2% of gross rental income).

Overall portfolio occupancy for FCOT fell from 96.6% in 1QFY15 and 95.4% in 4QFY15 to 92.9% in 1QFY16. On a positive note, FCOT achieved positive rental reversions of 10.3% for CSC and 5.0% for ATP for the quarter.

Pare our FV, but maintain BUY

Given the significant volatility seen in the financial markets in recent weeks, we see the need to increase our cost of equity assumption on FCOT from 7.9% to 8.6%. This causes our DDM-derived fair value estimate to decline from S$1.59 to S$1.42.

Despite our lower fair value, we are maintaining our BUY rating on FCOT, as we believe valuations remain attractive following its weak share price performance. The stock is currently trading at FY16F distribution yield of 8.2%, which is 1.5 standard deviations above its 5-year average yield of 7.1%.

Source: OCBC Research - 21 Jan 2016