• Stay NEUTRAL, SGD1.65 Target Price, 1% upside.
• FRASERS COMMERCIAL TRUST (SGX:ND8U)’s 3Q/9MFY19 (Sep) results are in line. The key positive for 3QFY19 was the healthy 12.6ppts increase in the portfolio committed occupancy rate to 94.1%, driven by Google Asia-Pacific (Google) signing its lease. The upside is largely priced in, with Frasers Commercial Trust's share price having risen 20% YTD.
• Current valuations are fair, in our view, with the stock trading at 1x P/BV, with a FY19F yield of 5.9%. We recommend investors buy on dips.

Operational Weakness Offset by Capital Returns

• Frasers Commercial Trust's 3QFY19 revenue and NPI declined 7%/3% y-o-y, mainly due to the lower occupancy rates at Alexandra TechoPark (ATP) and weaker AUD. This was partially offset by higher rent revenue for China Square Central (CSC), and lower maintenance and utility expenses.
• Management fees were fully paid in units, similar to the last few quarters.
• 3Q distributable income included a capital top-up of SGD6.3m (2QFY19: SGD4.9m, 3QFY18: SGD5.5m) resulting in a flattish y-o-y DPU growth. The results are in line, with 3QFY19 and 9MFY19 DPU comprising 25% and 74% of our estimated full-year DPU.

Occupancy Rate Stabilising at ATP

• Frasers Commercial Trust recently announced that Google will take Alexandra TechnoPark for five years from 1Q20 onwards with various tenants since the start of the year, bringing Frasers Commercial Trust’s committed occupancy rate to – 59.2%).
• Rent reversions were slightly positive, with recent signing rental rates at SGD4-4.60psf/month (psfpm) – higher than the average passing rental rate of SGD3.97psfpm as at end-2018.
• However, note that Microsoft Operations has this space.

Overseas Acquisitions Likely in the Near Term

• With net gearing of 29.3%, Frasers Commercial Trust has a good debt headroom of SGD350m (assuming 40% being the ceiling) for acquisitions.
• We believe Frasers Commercial Trust may consider their attractive yields and long WALE. Other markets include key cities in Australia.
• A Singapore asset acquisition looks unlikely, in our view, since current yields are too low for a yield-accretive acquisition.

CSC Retail Pre-commitments Ticking Up

• Asset enhancement works on the retail podium are expected to be completed by 2H19. Pre-commitments for retail portion rose to 60% (50% as at 2QFY19) with advanced negotiations for 20% of the space.
• The Government’s recent plan to rejuvenate the central business district, combined with completion of the retail and hotel component at CSC, should benefit the office space, where a majority of leases are due for renewal in the next two years.

Source: RHB Invest Research - 23 Jul 2019