Money Talk: Frasers Commercial Trust, Parkway Life Reit

China Square Central. -- PHOTO: FRASERS CENTREPOINT LIMITED
China Square Central. -- PHOTO: FRASERS CENTREPOINT LIMITED

SINGAPORE - Stay up to date on market chatter with our picks of the latest broker research reports, compiled by The Straits Times Money Desk.

1. Frasers Commercial Trust (FCOT)

Broker: OSK-DMG

FCOT currently owns and manages five properties with an asset base of $1.8 billion. We see multiple drivers for distribution per unit (DPU) growth over the next 12 months, which could lift DPU as much as 30 per cent.

These include the expiry of the master lease at Alexandra Technopark in August. FCOT receives a net rent of $1.80 per sq ft per month (psf pm) under the master lease but in the five years since the lease was signed, industrial rents have almost doubled, and today, market rents are in the vicinity of $3.60 psf pm. After accounting for property expenses, FCOT could potentially enjoy a 50 per cent uplift in net property income over the next 18 months, from the current $22 million to $33 million.

FCOT could also re-constitute its portfolio by selling its low-yielding 55 Market Street and acquiring Alexandra Point from its parent. We estimate this could raise its net property income by $7 million, or 8 per cent.

FCOT has rights to build a hotel at its China Square Central property. Not being in the hotel business, we think it is likely to sell this right to either its parent or a third party. And based on a residential landcost of $500 psf, the rights could generate proceeds of $85 million for the 170,000 sq site. This could be used to fund the shortfall in cash required from swapping 55 Market Street for Alexandra Point.

We estimate the above moves could lift FCOT's DPU from the current 8.3 cents (6.1 per cent DPU yield) to as high as 11 cents (8 per cent DPU yield) over a 18-month period. On a 7 per cent required yield, the stock could hit $1.54, translating to capital gains of 14 per cent.

2. Parkway Life Reit

Broker: CIMB

Parkway Life Reit has de-rated 5 per cent since our downgrade on May 2, which was largely premised on expensive valuations.

Fundamentally, it remains one of the most stable Reits with long leases, downside protection and inflation-linked rental reviews. There is further room for acquisitions given a healthy balance sheet at 35 per cent gearing and debt headroom of $131 million to $287 million at 40 per cent-45 per cent gearing.

We maintain our target price of $2.41 and upgrade Parkway Life Reit on valuation grounds. We have yet to factor in any acquisitions but estimate that a $100m acquisition at net property income yield of 7 per cent could lift our target price by 5 per cent to $2.53.