Redeeming most of remaining CPPUs. Frasers Commercial Trust (FCOT) recently announced that it had successfully redeemed 157.1m units, comprising c 45.9% of the total CPPUs originally issued. After the redemption in early April 2013, only 14.3m units - which translate into 4.2% of the original number of CPPUs issued - will remain outstanding. As the total number of CPPUs available on the company's balance sheet has been reduced significantly, we expect its DPU to grow by c. 6.8% and 13.9% for FY13 and FY14 respectively. Maintain BUY, with our DDM-based TP (COE: 7.5%, TGR: 2.0%) revised upward to SGD1.58.

CPPUs redemption to boost yield. Given that the CPPUs are costing FCOT an average 5.5% annually at the DPU level, and assuming that 80% of this exercise is funded by debt at an average annual interest rate of 3.3% while the rest is paid for in cash, the entire exercise is expected to drive DPU by 6.8% and 13.9% in FY13 and FY14 respectively.

Gearing to go up to 38% after redemption. In September 2012, FCOT successfully completed its divestment of KeyPoint and its other properties in Japan. Since then, after deploying the cash from the divestment to buy an initial 47.6% of the CPPUs and paring down its gearing, FCOT's gearing settled at a healthy 31.7%. However, assuming that 80% of this latest redemption exercise is funded through debts, we would expect the company's gearing to rise to 38% on completion of the exercise next month.

Maintain BUY, with higher SGD1.580 TP. Meanwhile, the company's success in redeeming the CPPUs will remove the overhang arising from possible share dilution in the event the CPPUs are redeemed. Given the positive impact of this exercise on FCOT's DPU as well as the bright prospects of its portfolio, we are maintaining our BUY rating on the counter, and revise upward our DDM-based TP to SGD1.58.

Source: OSK