Brokers' Call: Frasers Commercial Trust

Frasers Commercial Trust | Hold

Target price: $1.42

Dec 15 close: $1.42

Broker: OCBC Investment Research, Dec 15

Frasers Commercial Trust (FCOT) announced that it has entered into a 50:50 joint venture with its sponsor, Frasers Centrepoint, to acquire Farnborough Business Park (FBP), which comprises 14 commercial buildings in Britain. The purchase consideration of the asset comes in at £174.6 million (S$314 million), which is at a slight discount to the property valuation of £175.05 million.

FBP has a long weighted average lease expiry of 8.3 years with a high occupancy rate of 98.1 per cent. Based on pro forma net property income (NPI) as at Sept 30 this year, we estimate the NPI yield of FBP to be 6.4 per cent, higher than that of FCOT's existing portfolio yield of 5.5 per cent.

The acquisition is expected to be accretive, with pro forma distribution per unit expected to increase by 1.6 per cent from 9.82 cents as at Sept 30 to 9.97 cents, assuming financing based on a combination of debt and equity.

Suntec Reit | Buy

Target price: $2.30

Dec 15 close: $2.12

Broker: DBS Group Research, Dec 15

We, like all sell-side analysts, were blindsided by Suntec's past performance and missed the 30 per cent share price rally this year. However, we believe the rally can be sustained from current levels, as we now have greater confidence in chief executive Chan Kong Leong's ability to engineer a turnaround at Suntec mall, having done a deep dive into the property and identified easy wins to improve the mall's performance.

Over the years, there has been speculation of Suntec being privatised by Suntec's sponsor ARA Asset Management and its partners. While we are not privy to ARA's intentions, we believe with ARA now having the backing of Warburg Pincus and Avic Trust, ARA has the resources to privatise Suntec if the market undervalues Suntec.

Passing rents at Suntec mall of $10 psf to $11 psf a month are at a significant discount to other suburban malls of up to $17 psf to $18 psf a month.

We believe as Suntec remixes its tenant mix and picks the low-hanging fruits such as placing children's stores next to the playground rather than at opposite ends of the mall, the resultant higher foot traffic, tenant sales and improving rents should act as re-rating catalysts.

Property | Overweight

Broker: CIMB Research, Dec 13

We did ground checks across nine en-bloc projects to determine the underlying strength of residential replacement demand as well as the wealth creation effect from the unlocking of capital. The findings showed that replacement appetite would help to underpin demand in the coming year, in addition to organic household formation and upgrade appetite.

We estimate private home demand to reach 11,000 to 12,000 next year against potential launch of 10,000 units. We project private home prices to rise by up to 5 per cent next year. The anticipated high take-up rate should continue to propel property stocks to outperformance.

The office sub-sector continues to show the most supportive supply/demand dynamics for a rental recovery. The hotel industry was in the doldrums over the past three years due to an overhang from incoming supply. With new hotel room additions projected to average 1.7 per cent next year and our expectations of tourist arrivals growing at 3 per cent per annum, we see room for upside surprise in the hotel sector.

We maintain "overweight" on developers, "neutral" on Reits. Our preferred picks are UOL (target price, or TP: $9.62), City Developments (TP: $13.15), Frasers Centrepoint Trust (TP: $2.38), Frasers Logistics & Industrial Trust (TP: $1.20) and Far East Hospitality Trust (TP: 69 cents).

A version of this article appeared in the print edition of The Straits Times on December 18, 2017, with the headline 'Brokers' Call'. Print Edition | Subscribe