Frasers Commercial Trust - Key to unlock value (DBSVickers)

BUY S$0.815 STI : 2,832.73

Price Target : 12-Month S$ 1.05

Reason for Report : Asset management review of KeyPoint

Potential Catalyst: Refinancing execrcise and accretive acquistion

DBSV vs Consensus: Higher rental expectation upon the expiry of master lease at China Square Central

• Approval granted to redevelop KeyPoint into a commercial and residential development

• Possible divestment could reap profit of up to c$68m

• Maintain Buy and S$1.05 TP

Keypoint secures approval for residential/commercial development. FCOT announced that the URA has granted an outline planning permission (OPP) for the redevelopment of KeyPoint subject to key terms and conditions including a minimum 60% of GFA allocated for residential use and a commercial portion of not more than 40% but not less than 20% of GFA. The application for the OPP was carried out as part of FCOT’s regular asset management review to identify assets that could potentially be enhanced and optimised.

More options on the cards, possible profit of up to S$68m if a sale materialises. While we acknowledge that any plans for the property is rather preliminary, we see this development as positive as OPP provides flexibility in restructuring and sharpening its portfolio and asset planning including the possible hotel development component at China Square Central. We believe that an option for potential divestment of the property, apart from selling the residential redevelopment component, could unlock value for the trust. Our report highlights two scenarios assuming sale of the property for redevelopment into residential/commercial based on configurations of 60/40 and 80/20. Our estimates show that the trust could potentially unlock up to S$39-68m of our forecast under these two scenarios. This is 14-24% higher than the latest valuation of S$283m for Keypoint.

Maintain Buy, TP unchanged at S$1.05. We continue to like FCOT for its undemanding valuation of 0.6x P/Bk with FY11-12F yields of 7.6-8.1%, 180-240 bps above peers’ average of 5.7%-5.8%. More importantly, we think that the manager has been stepping up to reshape the portfolio in the last 6 to 12 months including the divestment of nonperforming assets. Going forward, we see opportunities for the group to enhance its DPU including the imminent refinancing exercise, which would lead to interest savings.