• Frasers Commercial Trust's 4Q19 DPU flat y-o-y at 2.40 Scts; in line.
• Lower underlying DPU from weaker AUD/GBP and softer occupancy at Alexandra Technopark.
• CSC retail podium TOP with 80% pre-committed lease to begin from November 2019 onwards; 72% of Microsoft-vacated lease backfilled.
• Maintain HOLD; Target Price of S$1.70.

Maintain HOLD; Target Price of S$1.70

• We maintain our HOLD rating on FRASERS COMMERCIAL TRUST (SGX:ND8U) and Target Price of S$1.70. With the signing of Google at Alexandra Technopark, this re-rating catalyst has largely played out.
• While we believe Frasers Commercial Trust's share price is likely to be range-bound near term, we would turn more bullish should Frasers Commercial Trust acquire UK assets at a faster pace or at a higher yield.

What’s New

4Q19 results in line; partially impacted by weaker AUD and GBP:

• Frasers Commercial Trust's 4Q19 DPU was flat y-o-y at 2.40 Scts. This took FY19 DPU to 9.60 Scts (flat y-o-y), in line with our expectations. See Frasers Commercial Trust Announcements.
• Excluding capital distributions of S$6.65m, the underlying 4Q19 DPU fell 22% y-o-y to 1.67 Scts while FY19 DPU fell 11% y-o-y to 7.21 Scts. See Frasers Commercial Trust Dividend History.
• The decline in underlying DPU is largely due to the depreciation of the AUD and GBP, and lower occupancy at Alexandra Technopark (ATP) as HP vacates the property.
• Revenue and NPI increased 1.3% and 0.5% y-o-y to S$33m and S$22m respectively, led mainly by higher rents achieved at China Square Central and higher vacancy at Central Park (occupancy at 83% in 4Q19 vs 70% in 4Q18), partially offset by weaker AUD and GBP (Australia portfolio NPI decreased 1% y-o-y and Farnborough NPI fell 9% y-o-y).
• Overall actual portfolio occupancy remained relatively flat q-o-q at 77.4% in 4Q19, while committed occupancy increased to 95% from 94.1% in 3Q19 led by improved occupancy mainly at Alexandra Technopark and 357 Collins Street, partially offset by lower occupancies seen in China Square Central (mainly from retail). Actual occupancy is expected to improve when the Google lease begins in 2QFY20.
• Frasers Commercial Trust recognised S$108m of fair value gains, mainly from its Singapore properties, offset by lower valuations for Caroline Chrisholm Centre (Caroline) and Farnborough.
• The higher valuation seen in Frasers Commercial Trust’s Singapore properties were mainly due to 25-bp and 50-bp cap rate compressions for office and retail respectively. Caroline saw cap rates expanding by 25bps while Farnborough was impacted by a weaker GBP.

Stable capital structure with a substantial debt headroom:

• Gearing fell marginally to 28.6% from 29.3% in 3Q19, implying debt headroom for future acquisitions, likely to be accretive acquisitions from overseas.
• Average cost of borrowings was relatively flat q-o-q at 2.97% as at 4Q19.
• Meanwhile, the proportion of fixed rate debt fell marginally q-o-q to 87.8% from 90.2% in 3Q19.

Singapore and Australia portfolio in local currency showed steady growth:

• Singapore portfolio’s 4Q19 revenue and NPI rose 6% and 2% y-o-y respectively, mainly from China Square Central which grew 20% and 22% y-o-y respectively.
• Australia portfolio’s 4Q19 revenue and NPI, in local currency, grew 3% and 5% y-o-y respectively, mainly from Central Park while lower maintenance expenses at Caroline Chisholm Centre contributed to the NPI growth.
• Aside from a weaker GBP, Farnborough Business Park’s 4Q19 NPI, in local currency, fell 4% y-o-y due to lower occupancy (97.4% vs 98.1% in 4Q18) and absence of reimbursement of lease incentives/rent guarantees by vendor.

Worse is over for ATP; 72% of space from Microsoft’s early termination has been backfilled:

• Post AEI works at Alexandra Technopark, Frasers Commercial Trust has seen strong demand with close to 490,000 sqft of leases signed (where 70% is the Google lease), of which 460,000 sqft are new leases.
• Signing rents have increased from S$4.30 psf/month to S$4.60 psf/month vs S$3.97 psf/month as at end December 2018.
• Given the strong demand, 72% of the early terminated Microsoft space has been backfilled with the rest under advanced negotiations. We understand these leases will see positive rental reversions.
• With committed occupancy at 96.8% vs actual occupancy of 59% as at September 2019, management expects contributions from Alexandra Technopark to be back on track from 2QFY20 onwards when the Google lease and new leases for Microsoft’s vacated space begins.

CSC retail podium obtained TOP in 4Q19; 80% pre-committed leases to begin progressively from November 2019:

• AEI works at the retail podium of China Square Central obtained TOP in 4Q19 with tenant fit-out works currently in progress and expected to progressively commence from November 2019 onwards, while committed leases have reached close to 80% to-date.
• Management expects to achieve a higher average retail rental rate at a high single digit vs mid-single digit reviously.

Limited exposure to co-working; WeWork centre at CSC has 90% occupancy:

• Given the recent concerns on co-working operators, management has addressed these fears with its limited exposure, only 3% of its total portfolio are leases to co-working operators.
• While some of these leases have begun, two co-working leases (JustCo at CSC and WeWork at Central Park) will begin in FY20.
• In addition, the WeWork centre at CSC is operating at 90% occupancy.
• In the worse-case scenario, Frasers Commercial Trust holds rental deposits corporate guarantees from the WeWork operators.

Where We Differ: Close-to-average Spread to Large-cap Office REITs

• Frasers Commercial Trust on average has historically traded at 1.2% higher yield than its large-cap office peers given its Grade B, business park and overseas exposure.
• Frasers Commercial Trust’s earnings are expected to recover in FY21 when full-year contribution from Google kicks in and Frasers Commercial Trust no longer needs to rely on capital distributions to support its DPU. Then, its estimated forward yield of 6% would be close to its average historical spread. Thus, compared to more bullish investors, we believe there is limited valuation support to drive Frasers Commercial Trust's share price higher in the near term.

Source: DBS Research - 23 Oct 2019