• FCOT's 3Q/9MFY19 DPU of 2.4/7.2 Scts in line with expectations.
• Topline affected by lower Singapore and Australia contributions.
• Monetising 55 Market St, raises balance sheet capacity for new acquisitions.
• Maintain Hold, Target Price unchanged at S$1.50.

3QFY9/18 Results Highlights

Frasers Commercial Trust (FCOT) maintained a 3QFY9/18 DPU of 2.4 Scts, unchanged y-o-y and q-o-q. Despite a 15% drop in topline and 22% decline in NPI y-o-y, distribution income was 10% higher y-o-y to S$21.2m due to a S$5.5m (3QFY17: S$0.9m) distribution of gains from the disposal of hotel development rights. Results for 3Q and 9M were in line with expectations at 4%/72% of our full-year forecast.

Drag From Lower Singapore and Australia Revenue

Gross revenue was affected by lower occupancy at China Square Central (CSC) due to ongoing asset enhancement initiatives and lower occupancy at Alexandra Technopark (ATP) as well as higher maintenance expenses at Caroline Chisholm Centre in Australia. Singapore committed portfolio occupancy slipped to 72.2% in 3Q (vs. 76.1% a quarter ago) due to the phased reduction of HP’s lease area at Alexandra Technopark.

The weakness was partly offset by contributions from the 50% stake in Farnborough Business Park.

Continued Income Pressure From ATP and CSC

Occupancy at Alexandra Technopark dipped to 64.2% at end-3Q with additional space vacated by HP. To date, FCOT has been able to backfill 20% of this space. HP has another 149,000sqft of leases expiring between 2HFY18 and 1QFY19. Hence, income volatility from this property should persist. The AEI for Alexandra Technopark was completed in Jun 18 and includes a new amenity hub that will house a variety of F&B offerings and other services. This should increase the leasing attractiveness of the property.

Meanwhile, the AEI at China Square Central is ongoing and scheduled to be completed by mid-2019. The increased retail and commercial spaces should enjoy better frontage and visibility while the new 304-room Capri by Fraser Hotel should increase activity in China Square Central.

Monetising 55 Market St

Frasers Commercial Trust (FCOT) sold the 55 Market St office property to a third party for S$216.8m, or at an NPI yield of 1.6% based on the property’s annualised 3QFY18 NPI. The trust should be able to realise a net gain of S$67m above the latest valuation. Post divestment, FCOT’s gearing could improve by 8.2% pts (assuming proceeds are used to repay debt) compared to its current gearing of 35.4% while its book NAV rises by S$0.10/unit.

More importantly, this will unlock balance sheet capacity and enable it to recycle capital into higher yielding investments. This further enhances acquisition growth visibility. We have not included any new acquisitions into our current forecast and Target Price.

Maintain HOLD

We leave our FY18-20 DPU estimates unchanged and maintain our HOLD rating and Target Price of S$1.50, based on DDM (cost of equity: 8.33%). FCOT is currently trading at 6.8% FY18 DPU yield.

Re-rating catalysts could come from new accretive acquisitions while downside risk could come from longer-than-expected vacancy at Alexandra Technopark.

Source: CGS-CIMB Research - 25 Jul 2018