• Defensive asset acquired
• New opportunities in Europe
• Upgrade to BUY

Yield-accretive Asset Inducted Into Portfolio

Frasers Commercial Trust (FCOT) announced that it has entered into a 50:50 JV with its sponsor, Frasers Centrepoint Limited (FCL), to acquire Farnborough Business Park (FBP), which comprises 14 commercial buildings in the UK. We like the defensive attributes of the asset, as it has a long WALE of 8.3 years and a high occupancy rate of 98.1%. FBP also has a good mix of 36 tenants, featuring quality names like Fluor Limited as well as INC Research UK Ltd. Based on pro forma NPI as at 30 Sep 17, we estimate the S$ NPI yield of FBP to be ~6.4%, which is higher than that of FCOT’s existing portfolio yield of ~5.5%.

Enlarged Investment Mandate to Drive Next Phase of Growth

We are particularly encouraged by the expansion of FCOT’s investment mandate to include real estate assets in Europe including the UK used for commercial purposes, including business parks. Recall that FCOT’s last acquisition was in Aug 2015, and there have been concerns about its ability to grow since, given the environment of yield compression in Singapore and Australia.

Furthermore, we note that FCL’s recentlyacquired portfolio of business parks in Thames Valley is complementary to FBP, and would allow FCOT to tap on FCL’s asset management platform for greater synergy and operational efficiency. Given FCOT’s expanded ROFR pipeline, we think that it will be logical for an injection of some of these assets into FCOT’s portfolio at a later stage.

DPU Growth Expected

We are cognizant of the lingering concerns at Alexandra Technopark and the challenges in backfilling space vacated (or soon to be vacated) by the Hewlett-Packard entities. However, with greater clarity over the situation, as well as management’s ability to tap on previous capital gains, we believe that DPU, based on the existing portfolio should remain stable, and will be further augmented by growing the UK/Europe portfolio.

All things considered, while we have chosen to impute more conservative occupancy assumptions for ATP, we have also accounted for FBP’s accretion to the portfolio, and our DPU estimate for FY18 rises by 1.1% to 9.92 S-cents.

Given management’s goal of building a balanced and diversified portfolio across geographies, we lower our beta assumption and our cost of equity now drops to 8.2%.

With our fair value estimate now rising to S$1.51, we upgrade FCOT to a BUY.

Source: OCBC Research - 18 Dec 2017