Frasers Commercial Trust: Well positioned for growth

● Positive move to exit Japan market
● Lower funding cost burden
● Good growth potential

Transformational year
We are very positive on Frasers Commercial Trust’s (FCOT) transformation over the past one year. At the close of 4QFY12, FCOT announced the exit of the Japan market with the divestment of its Japan properties. This was earlier than we expected, even though we had been anticipating the move. We like the transaction because
1) the Japan properties had been recording weak performance,
2) divestment would enhance the portfolio occupancy and weighted average lease to expiry, and
3) gearing ratio is expected to drop from 36.8% to 28.6% (including partial prepayment of its AUD and SGD loans), with no debt maturing until FY15.

This will significantly strengthen its financial position and flexibility, and aid FCOT in seeking the release of 55 Market Street and Caroline Chisholm Centre (CCC) from its securitized pool.

Successful redemption of CPPUs
More recently, FCOT had also exercised its right of redemption in respect of 170.7m Series A CPPUs, representing 50% of the number of CPPUs in issue. This is in line with our view that FCOT may redeem half of the CPPUs using the net proceeds
(S$537.8m) of KeyPoint divestment. Based on the latest announcement on 5 Dec, FCOT had successfully redeemed 162.6m CPPUs, or ~47.6% of total outstanding CPPUs, in cash. With this positive development, we expect FCOT to post an improvement in the distributable income going forward, since the funding costs (distribution rate) of the CPPUs are relatively high at 5.5%.

Maintain BUY
Apart from having a significantly strengthened financial position and lower funding cost burden, we expect FCOT to gain from interest savings following the refinancing of its S$500m term loan facility. In fact, average borrowing rate fell from 4.0% in 3Q to 3.5%. In addition, the increased stake in CCC and expected improved performance at China Square Central will likely continue contributing positively to its rental income. Hence, we are staying optimistic on its growth potential in FY13. Maintain BUY with an unchanged fair value of S$1.31 on FCOT.