• 1QFY18 DPU of 2.40 S-cents
• Rent uptick in Grade B assets still elusive
• 9.2% returns in ~5 weeks

1QFY18 Within Expectations

Frasers Commercial Trust’s (FCOT) 1QFY18 results were in-line with our expectations. Gross revenue fell 11.0% YoY to S$35.3m, which formed 23.1% of our FY18 forecast. We believe that a greater proportion of FCOT’s full-year topline will be skewed towards 2HFY18, given that contribution from the recent Farnborough Business Park (FBP) acquisition should only commence from end-Jan 2018.

China Square Central saw a 15% YoY drop in NPI on the back of planned vacancies, while we also understand that the 25% YoY drop in NPI at Alexandra Technopark (ATP) was largely a function of the HP entities giving up space previously. These contributed to a 4.4% YoY fall in DPU to 2.40 Scents, which comprises 24.2% of our full-year forecast.

Grade B Core CBD Rents Still Not Enjoying Positive Spillover Effect

We remain positive on the FBP acquisition and the broader investment mandate that FCOT has now received, as in our opinion, these developments give longer term clarity as to where FCOT’s growth opportunities lie. However, lingering issues still beset its current portfolio. We note that management does not appear to be expecting a trickle-down effect from the uptick in the Grade A CBD Core rents for this year, despite CBRE reporting a 1.4% YoY increase in Grade B CBD Core rents for 4Q17.

There has also been no update on plans to backfill HP Singapore’s upcoming expiries in Jan-Feb’18, which take up ~12.6% of ATP’s NLA. This is on top of the vacant space left behind by HP Enterprise, which we estimate to be currently ~11% of ATP’s NLA.

Valuation Difference Against Peers Justified

Since we upgraded FCOT in mid-Dec 2017 following the FBP acquisition announcement, the unit price has increased 9.2% from S$1.42 to S$1.55. While many of FCOT’s peers have seen their forward yields compress to ~2 S.D. below their 5-year means, FCOT’s forward yield (at ~6.4%) is just around 1 S.D. south of its 5-year mean. However, in light of the above, we believe that the difference in outlook for Grade A and FCOT’s Grade B CBD Core rents does justify this valuation variance for now. We maintain our fair value estimate of S$1.51.

Source: OCBC Research - 23 Jan 2018