• 3QFY16 DPU rose 2.6% YoY
• Lease extension by Microsoft
• BUY with higher FV

3QFY16 results met our expectations

Frasers Commercial Trust (FCOT) reported its 3QFY16 results which met our expectations. Gross revenue increased 11.1% YoY to S$38.6m, while NPI jumped 15.6% to S$28.1m. This was largely driven by contribution from the acquisition of 357 Collins Street in Australia on 18 Aug 2015, higher rental and lower utilities expenses at Alexandra Technopark (ATP), but partially offset by lower income from China Square Central (CSC) and its remaining Australia properties.

DPU rose 2.6% YoY to 2.41 S cents. On a 9MFY16 basis, FCOT’s gross revenue was up 11.6% to S$117.2m and constituted 73.4% of our FY16 forecast. DPU of 7.37 S cents represented growth of 2.5% and accounted for 74.8% of our full-year forecast.

Microsoft extended its lease at ATP for a further five years

One major development which took place during the quarter was Microsoft’s decision to extend its current lease at ATP for another five years. The original lease would only be expiring in FY17, but has now been extended to FY22. Microsoft occupies ~7.4% of ATP’s NLA, equating to 78,000 sq ft of space. FCOT’s overall portfolio occupancy stood at 93.3%, a modest improvement from 2QFY16 (92.6%).

Management delivered robust rental reversions in Singapore, with rental uplifts of 5.5%, 10.3% and 8.4% secured at CSC (Office), 55 Market Street and ATP, respectively. Looking ahead, we believe rental reversions are likely to moderate, as FCOT’s average passing rent for its expiring leases in Singapore are now close to market rents.

Maintain BUY

In terms of financial position, FCOT’s gearing ratio was stable at 36.3%, as at 30 Jun 2016, with 81% of its gross borrowings hedged. We retain our forecasts given this in-line set of results. However, we lift our fair value estimate from S$1.42 to S$1.45 as we factor in a lower risk-free rate assumption of 2.4% (previously 3.0%) in our model, given our view that the interest rate environment would likely stay accommodative for a prolonged period of time. Maintain BUY.

Source: OCBC Research - 25 Jul 2016