Frasers Commercial Trust - Gravitating towards an exciting year! (DBSVickers)

BUY S$0.83 STI : 2,825.10

Price Target : 12-Month S$ 1.05

Reason for Report : Post NDR update

Potential Catalyst: Lower financing cost,positive rental renewals, asset repositioning and acquistions

DBSV vs Consensus: Slightly higher rental outlook

• Steady portfolio performance with enhancements/repositioning and capital management to boost DPU

• Resilient earnings tied by long/master leases

• Attractive valuations; maintain BUY, S$1.05 TP

Multi-pronged growth strategies to drive DPU. In a recent NDR with FCOT, investors view management’s efforts to reshape its portfolio and strengthen its balance sheet as proactive steps to steer the reit in the right direction. Performance portfolio has improved remarkably compared to the last crisis with occupancy standing at a high of 98% and signing rents moving up nicely. Meanwhile, its balance sheet has improved with gearing at 37% and the imminent refinancing that is likely to lower all-in interest cost by 50-100 bps. The recent approval for an outline planning permission (OPP) to redevelop KeyPoint as well as possible asset enhancement plans at China Square Central (CSC) upon expiry of the master lease in Mar 2012 should further help to optimize portfolio yield.

Stable earnings supported by “sticky” tenant base and long leases. Excluding CSC’s master lease (expiring in Mar 2012), almost half of its revenue is tied to master/long leases of up to 25 years. This would ensure resilient and stable earnings, while allowing the trust to enjoy positive rental reversion. At the same time, we note that rents for its SG portfolio are competitive, hence it is able to cater to a “niche market” ie cost conscious small-to mid-size companies or relocating tenants from soon-to be demolished older buildings. In addition, our scenario study shows that FY12/13F DPU will only fall by a marginal 2-5% should reversion rents fall by 5-10% or to 2009 levels for its SG portfolio, hence minimizing downside risk should there be an economic slowdown.

Attractive valuations at 7.4-7.8% yield. At 0.61x P/BV NAV, FCOT’s implied property yield is significantly higher than the current book cap rates. Therefore, we see potential for the gap to narrow as the group executes its multi-pronged strategies. FY11/12F yields of 7.4-7.8% are also much higher than its peers at 5.6%-6.6%. Maintain BUY at an unchanged DCF-backed TP of S$1.05.