SINGAPORE (Dec 18): OCBC Investment Research is upgrading its call on Frasers Commercial Trust (FCOT) to “buy” from “hold” with a higher fair value estimate of $1.51.
This follows the trust’s recent entry into a 50:50 joint venture (JV) with its sponsor to acquire Farnborough Business Park (FBP) in the UK for $314.8 million, marking FCOT’s first stop in expanding its investment mandate to Europe.
See: Frasers Centrepoint and Frasers Commercial Trust acquire Farnborough Business Park for $314.8 mil
In a Monday report, lead analyst Joseph Ng says he likes the new asset’s defensive attributes given its long weighted average lease expiry (WALE) of 8.3 years; high occupancy rate of 9.81%; and a good mix of 36 tenants, with quality names including Fluor Limited and INC Research UK.
Based on pro-forma net property income (NPI) as at end-Sept, he estimates that the NPI yield of FBP translates to around 6.4% in Singapore currency terms, which is higher than that of FCOT’s existing portfolio yield of ~5.5%.
“We are particularly encouraged by the expansion of FCOT’s investment mandate to include real estate assets in Europe including the UK used for commercial purposes, including business parks. Recall that FCOT’s last acquisition was in Aug 2015, and there have been concerns about its ability to grow since, given the environment of yield compression in Singapore and Australia,” says Ng.
“Furthermore, we note that FCL’s recently acquired portfolio of business parks in Thames Valley is complementary to FBP, and would allow FCOT to tap on FCL’s asset management platform for greater synergy and operational efficiency. Given FCOT’s expanded ROFR pipeline, we think that it will be logical for an injection of some of these assets into FCOT’s portfolio at a later stage.”
While Tan remains cognisant of concerns which remain over Alexandra Technopark (ATP) and the challenges it faces in backfilling vacated or soon-to-be vacated space, the analyst believes the trust’s distribution per unit (DPU) based on its existing portfolio should remain stable, and will be further augmented by its growing UK/Europe portfolio.
As such, OCBC’s DPU estimate for FY18 has risen to 1.1% to 9.92 cents after factoring in FBP’s accretion to the trust’s portfolio even after imputing more conservative occupancy assumptions for ATP.
“Given management’s goal of building a balanced and diversified portfolio across geographies, we lower our beta assumption and our cost of equity now drops to 8.2%,” adds Ng.
As at 12 noon, units of FCOT are trading 1 cent higher at $1.43, representing a FY18F DPU yield of 7.05%.
