SINGAPORE (Apr 5): OCBC Investment Research is upgrading Frasers Commercial Trust (FCOT) to “buy” from “hold” with an unchanged fair value of $1.51 on expectations of an impending recovery of Grade B CBD Core office rental rates.
In a Thursday report, lead analyst Joseph Ng says that while Grade A CBD Core landlords would be the immediate beneficiaries of Singapore’s robust economic outlook, he believes their Grade B CBD Core peers should also enjoy some upside, albeit belatedly.
“CBRE is forecasting Grade B CBD Core monthly rates to rise approximately 7.4% and approximately 8.8% in 2018 and 2019, respectively. This follows from the eight consecutive q-o-q rental declines seen between 2Q15 – 1Q17,” he observes.
Recalling how FCOT’s forward yield tightened to about 5.5% at the start of the last rental recovery cycle in 1H13, Ng notes that the trust is currently trading at 7% FY18F yield, which is about 0.2 standard deviations below the seven-year mean.
This is in comparison to its Grade A peers such as CapitaLand Commercial Trust (CCT) and Keppel REIT, which are already trading near 2012 to 2013 forward yields and are more than 1 S.D. below their respective seven-year means.
As such, he believes current levels are attractive against OCBC’s unchanged fair value estimate.
“In our bear case scenario, we believe that FCOT should at least achieve FY16 and FY17 DPUs of 9.82 cents (only 1.0% below its base case of 9.92 cents), supported by the distribution of capital gains arising from the previous disposal of the hotel development rights for China Square Central,” says Ng.
Beyond Singapore, the analyst expects Melbourne CBD office rents to remain robust, with FCOT’s 347 Collins Street asset to gain its lease expiries in FY18 and another 6.3% or four leases subject to mid-term lease rent reviews this year.
“Melbourne CBD office market continues to demonstrate significant resilience. Vacancy is expected to fall to a 10-year low of 4.1% by mid-2018, according to Knight Frank, while prime grade office net face rent is forecasted to grow by 6.5% per annum over the next two years. In our opinion, FCOT’s 357 Collins Street is well-positioned to participate in this cyclical upturn,” he adds.
As at 11:23am, units in FCOT are trading flat at $1.41, implying an estimated price-to-earnings ratio of 17.8 times for FY18F.
