• 3QFY17 DPU -0.4% YoY
• HP tenancy expiries on the horizon
• Downgrade to HOLD

3QFY17 Results Were In-line With Our Expectations

Frasers Commercial Trust’s (FCOT) 3QFY17 results came in broadly within our expectations. Gross revenue and NPI fell 0.6% and 0.8% YoY to S$38.3m and S$27.9m, respectively, while DPU dropped 0.4% YoY to 2.40 S cents. The better performance by FCOT’s Australian portfolio on the back of a stronger AUD was offset by lower occupancy rates at Alexandra Technopark, China Square Central and Central Park. Notwithstanding the above, on a 9MFY17 basis, gross revenue and NPI both rose by 0.9% YoY to S$118.2m and S$87.1m, respectively. DPU improved by 0.5% YoY to 7.41 S-cents, forming 74.9% of our FY17 forecast.

Concerns on Hewlett-Packard (HP) Remain

We note that the leases for two HP entities that will expire in Q4FY17 and Q1FY18 comprise ~18.2% of the portfolio’s gross rental income. Moreover, given the new HP facility along Depot Road, we think it is highly likely that HP will relocate, at least in part, which we have duly incorporated into our model.

That said, we acknowledge that management will be able to mitigate any income shortfall by leveraging various tools such as the distribution of capital gains arising from the previous disposal of the hotel development rights for China Square Central. Still, we deem that such measures should only be for stabilisation purposes and hence achieving DPU growth in the near term is likely to prove challenging.

Downgrade on Uncertainties and Valuations

Looking ahead, we see signs of stabilisation in the Singapore office sector, with CBRE noting that Grade B CBD Core rents in 2Q 2017 remained unchanged QoQ at S$7.25 psf. In Australia, the prime grade rents in Perth appear to be approaching a trough, while Melbourne’s CBD office market continues to remain strong.

While these are encouraging signs, we note that on a YTD basis, FCOT’s share price has gained 17.3%, and is currently trading at a 12M forward blended yield of 6.8%, which is ~0.3 S.D. below its 5-year mean. Therefore, a good share price run-up, coupled with lingering concerns about HP’s leases would prompt us to take a more cautious stance despite the potential income support levers and increasingly favourable macro trends. Hence, we downgrade FCOT to a HOLD but at a higher fair value of S$1.42 (previously S$1.39).

Source: OCBC Research - 26 Jul 2017