Frasers Commercial Trust: Expecting better performance in FY12 (OCBC)

Results within expectations. Frasers Commercial Trust (FCOT) delivered 4QFY11 DPU of 1.52 S cents on the back of a 4.8% YoY growth in NPI to S$24.3m. This brings the full-year DPU to 5.75 S cents, which is roughly within our and consensus expectations of 5.6 S cents and 6.0 S cents, respectively. Key drivers for the quarterly NPI came from strong contributions from Central Park (+26.8%) and Caroline Chisholm Centre (+13.6%), due to improvement in occupancy and rental rates, and strengthening of AUD against SGD. Average 4QFY11 portfolio occupancy rates also tracked a substantial improvement from 90.8% in 4QFY10 to 98.0%, underpinned by healthy rates of 97.8% for Singapore and 99.8% for Australia. As at 30 Sep, we note that the weighted average lease to expiry (WALE) was at a healthy 3.6 years, thanks to long Australian portfolio duration of 6.8 years.

Expecting improving performance. Going into FY12, we maintain our view that FCOT may continue to post improvement in its operating performance, barring any fallout in the office rental market. According to management, 29.3% of the gross rental income is due for renewal, of which 16.0% is attributable to the expiry of China Square Central (CSC) master lease arrangement in Mar 2012. We understand that CSC's average passing rents of S$6 based on the underlying leases is below the recently contracted rents of S$6.30-8.00, while its underlying occupancy is at a strong 95.7%. With management's intention not to renew the lease but to take over the management of the property upon its expiry, we are likely to see further rental growth on this front. This is in addition to the weighted average increase in portfolio step-up rents of 3.9% expected in FY12.

Maintain BUY. Following FCOT's decision to embark on an early re-financing exercise to take advantage of the prevailing low interest rate environment, the group also reported on 22 Nov that it had secured a new A$105m loan facility. We note that this facility, which will be used to repay the outstanding amount of A$103.4m relating to its existing A$150m loan facility, has an interest rate based on Australian BBSY rate plus margin of 1.55% (vs. existing 2.65%). Hence, we may expect DPU uplift from interest savings. We make minor adjustments to our FY12 forecasts to factor in these recent developments. Our DDM-based fair value, however, remains unchanged at S$0.87. Retain BUY on FCOT.