4QFY12 D PU in line with expectations. Frasers Commercial Trust (FCOT) reported 4QFY12 DPU of 1.75S'' (+15% YoY). Together with the first three quarters, FY12 DPU came to 6.69S''; 1.6% below our FY12 DPU estimate. Revenue and net property income for this quarter came in at S$35.6m (+17% YoY) and S$26.5m (9% YoY) respectively. Distributable income came in at S$16.1m (+12% YoY), mainly attributable to the additional income contribution from the additional 50% stake in Caroline Chisholm Centre and the one-off gain of S$72.8m from the divestment of KeyPoint. Recently, FCOT has also divested its three properties in Japan. By doing so, coupled with the proceeds from the divestment of KeyPoint, gearing has been pared down to a healthy level of 28.6% (vs 36.8% previously). Going forward, with S$198.3m of proceeds left, we believe FCOT will either (i) try to acquire a property that gives out a yield of at least 5.5% or (ii) redeem a portion of its CPPU which is currently giving out an annual yield of 5.5%. Given FCOT low gearing, high
occupancy rate of 94.9%, AEI at China Square Central and a strong Australia portfolio, we continue to favor this trust for its attractiveness and maintain our BUY rating on FCOT with a DDM based (COE: 7.9%; TGR: 1.0%) TP of S$1.410

Gearing brought down from 36.8% to 28.6%. Since 28th September, FCOT has completed its divestment of KeyPoint and announced that 44.6% of the net proceeds from the divestment will be used to pay back portions of two term loan facilities. By doing so, net gearing of FCOT will be adjusted to a healthy level of 32.1%. Together with the divestment of FCOT's Japanese properties, the current gearing has reached a low 28.6%; giving the trust a head room of c.S$120m for future possible acquisitions.

Redemption of CPPU expected to be the next key driver. As highlighted in our previous report, after the divestment of KeyPoint and paring down gearing, FCOT is most likely going to redeem a portion of their CPPU. Given that CPPU can only be redeemed at the beginning of each quarter, we speculate that the manager of FCOT will announce the redemption a portion of its CPPU by December 2012.

Maintain BUY with higher TP of S$1.410. In addition, as the manager of FCOT completes the divestment of the underperforming properties in its portfolio, we believe the manager will focus on improving the quality of its existing portfolio through AEIs while at the same time look out to acquire better yielding properties. In view of these positive factors we have maintained our BUY rating on FCOT with a revised DDM based TP of S$1.41.

Currently trading at 4.5% spread to 10-year bond yield. FCOT is currently trading at 4.5% spread to 10-year bond yield. Although this is lower than the historic mean spread of 4.9%, it is still significantly higher than the spread (c.3.0%) it was trading at in 2010. Our TP of S$1.41 translates to a reasonable spread of 3.6%.

Source: OSK