SINGAPORE (July 3): Frasers Commercial Trust (FCOT) is poised for a turnaround, thanks to tech giant Google.
FCOT in late June announced it had inked a lease agreement with Google Asia Pacific, which will occupy some 344,100 sf of space at the newly-revamped Alexandra Technopark (ATP), for a term of five years starting in the first quarter of 2020.
Accounting for one-third of the current total net lettable area of the property, the lease will help push ATP’s committed occupancy up to 93.7%, compared to 59.2% at end-March.
Following the announcement after market close on June 25, units in FCOT surged some 6.3% over the next two days to close at $1.68 on June 27.
As at noon on Wednesday, units in FCOT are trading up 1.2% for the day to hit a 52-week-high of $1.69.
“We believe the market should view the signing of Google as a major tenant at ATP positively,” says DBS Group Research lead analyst Mervin Song in a flash note following the announcement.
See: Google Asia Pacific is new tenant at Alexandra Technopark
The way Song sees it, FCOT’s share price has been range bound and the stock has been seen as a laggard against its large-cap office peers after Hewlett-Packard Enterprise and Hewlett-Packard Singapore, which then occupied a total of 44% of ATP’s NLA, announced in 2017 it would vacate the office building when its leases expired.
Since then, ATP has undergone a $45 million asset enhancement initiative (AEI), which was recently completed.
And market watchers say the Google lease is testimony to the strong tenant appeal of the refurbished ATP, amid the robust office leasing market given the low new incoming supply in 2019 and 2020.
“With additional income from Google, in our view there is a high likelihood FCOT will have a ‘clean yield’ – without capital distributions – from FY21 onwards, which should help close FCOT’s yield differential with its large-cap peers,” says DBS’s Song. He notes that FCOT’s yield has been elevated, at around 2% higher than its large-cap peers.
DBS has a “buy” call on FCOT with an unchanged street-high target price of $1.70.
Meanwhile, RHB Research analyst Vijay Natarajan notes that FCOT’s current gearing of 29.1% is one of the lowest among the S-REITs.
The analyst believes this means FCOT has an ample war chest for acquisitions, which could be the likely key catalyst ahead.
“In the near term, we believe FCOT may consider acquiring the remaining 50% stake in Farnborough Business Park (FBP) and other sponsor assets in the UK – once Brexit-related uncertainties are removed – due to their attractive yields and long WALE,” says Natarajan.
RHB is maintaining its “neutral” call on FCOT, and raising its target price by 10% to $1.65.
CGS-CIMB Research analyst Lock Mun Yee shares the optimism over FCOT’s low gearing.
“With significant debt headroom, FCOT is well positioned to tap potential inorganic growth opportunities, especially in the UK and Australia,” says Lock.
CGS-CIMB is upgrading FCOT to a “buy” with a higher target price of $1.64, from $1.50 previously.
This comes on the back of higher DPU forecasts for FY20-21F, which were raised by 4.3-7.5%. “FCOT is trading at 6.1% FY19F DPU yield, on the higher end of comparable office REIT peers,” Lock adds.
According to DBS valuations, FCOT is trading at a price-to-earnings (PE) ratio of 24.2 times and a dividend yield of 6.1% for FY19F.
