• NEUTRAL, SGD1.65 Target Price implies 1% upside with 6% FY20F (Sep) yield.
• Frasers Commercial Trust’s FY19 results are in line, with DPU accounting for 99% of our full-year forecast.
• Frasers Commercial Trust’s operational performance across its assets has improved, with a healthy increase in committed occupancy rates – but it will take a few more quarters for organic DPU to stabilise.
• While gearing remains low, yield-accretive acquisition opportunities remain limited. With the lack of strong catalysts, its current valuation of 1x P/BV with a 6% yield is fair.

Improving Operational Metrics

• While FRASERS COMMERCIAL TRUST (SGX:ND8U)’s DPU remains stable y-o-y and q-o-q, this was mainly due to higher capital distribution from divestment gains (4QFY19: SGD6.7m, +277% y-o-y) offsetting some of the transitional vacancies in key assets. See Frasers Commercial Trust Announcements; Frasers Commercial Trust Dividend History.
• Frasers Commercial Trust’s portfolio committed occupancy rate improved by 11.6ppt to 95%, with the successful repositioning of Alexandra Technopark (ATP).
• With the occupancy ramp-up in Alexandra Technopark and the completion of China Square Central’s retail podium by the end of the year, we expect operational DPU to improve significantly this year and stabilise by 3QFY20.

Strong Demand for Revamped Alexandra Technopark Space

• The committed occupancy at Alexandra Technopark increased 3.1ppt q-o-q to 96.8%, with Frasers Commercial Trust seeing strong demand (especially from the tech sector) for the building. The signing rental rates for the quarter were also 8-16% higher than the current passing rate of SGD3.97psf – which indicate that management’s efforts to reposition the asset are paying off. The new anchor tenant, Google (occupying ~33.3% of NLA), will start paying rent from 2QFY20 onwards – which should contribute positively to numbers.
• For China Square Central’s retail podium, the committed occupancy rate stands at 80%, with negotiations underway for another 10% of space. Current signing rental rates are in the high single digits, in line with its estimates. The mall is expected to open in phases, from Nov 2019 onwards.

Awaiting Acquisitions

• Frasers Commercial Trust’s current gearing of 28.6% is one of the lowest among the S-REITs. While its debt headroom of SGD350m (assuming a 40% maximum) is healthy, we see limited yield-accretive acquisition opportunities from the sponsor pipeline currently. The remaining 50% stake in Farnborough Business Park (FBP) is a near-term potential acquisition, in our view – when Brexit-related uncertainties are removed.

Stable Australian Performance Barring AUD Weakness

• Frasers Commercial Trust's 4QFY19 NPI contributions from its Australia portfolio were stable q-o-q, barring the slight impact of the weaker AUD. The occupancy rate at Central Park (CP) has improved to 83% (FY18: 70%) and management is currently undertaking a SGD23m asset enhancement initiative (expected to be completed in 3QFY20) to upgrade the lobby and forecourt areas to strengthen the asset’s positioning.
• Overall, we expect the performance of its Australian properties to remain stable, with potential upside from Central Park (CP) post-AEI completion.

DPU Adjustments

• We fine-tune FY20-22F DPU by -1 to +1%, by adjusting our rental growth and occupancy rate assumptions.

Source: RHB Invest Research - 23 Oct 2019