Frasers Commercial Trust - Poised for the turn (CIMB)

OUTPERFORM Maintained

S$0.87 Target: S$0.99

Mkt.Cap: S$546m/US$454m

• In line; maintain Outperform. 3Q11 DPU of 1.38cts meets our forecast and Street expectation at 24% of our FY11 figure. 9M11 DPU forms 74% of our estimate. DPU was up 10% yoy on stronger NPI contributions from almost all its self-managed assets mainly on better occupancy. Occupancy at KeyPoint had improved for the ninth consecutive quarter. An improving underlying portfolio at China Square Central meanwhile should position FCOT for upside when it takes over direct management in Mar 12. No change to our DPU estimates or DDM-based target price of S$0.99 (discount rate: 9.4%). With an improving portfolio, stable capital structure and a strong sponsor in F&N, we see no reason for its 35% discount to book amid forward yields of 7%. We see catalysts from early refinancing, the unlocking of value from AEI at China Square Central and improvements in occupancy and rentals.

• 3Q11 net property income up 10% yoy and 4% qoq. NPI was up 10% yoy on stronger contributions from Central Park, Caroline Chisholm Centre and Keypoint. Qoq, NPI was up 4% as there were improvements at its Australian assets. Occupancy at KeyPoint also continued to improve for the ninth consecutive quarter to 86% since the in-house team took over property leasing in 2Q09. Passing rents were stable at about S$5 psf with limited exposure to higher rollover rents locked in at the 2008 peak.

• Improvements at China Square Central. China Square Central’s underlying occupancy improved 20bp, with recent leases renewed at S$6.30-8.00 psf vs. expiring rents of S$6.30 psf and passing rents of below S$6 psf. Continued improvements in occupancy and rentals on the back of more proactive management by FCOT and an upcoming Telok Ayer MRT station could position FCOT for upside when it takes over direct management following the expiry of the master lease in Mar 12.

• Potential upside from refinancing. Asset leverage had been pared down to about 37% after the divestments of AWPF and Cosmo Plaza. This entire amount (S$745m) will mature in 2012. With a high cost of debt of 4.3% and prolonged low interest rates, FCOT could save in terms of interest following the refinancing of this debt. We estimate that a 50bp interest-rate reduction could lift its DPU by 11%.