While the share price of Frasers Commercial Trust (FCOT) over the past 18 months has rallied, it has lagged the other office REITs such as CapitaLand Commercial Trust (CCT) and Keppel REIT (KREIT) now that concerns over the impact of HP vacating Alexandra Technopark (ATP) and concerns over a lack of growth have been addressed.
The news that HP Inc will stagger its exit from ATP finally removes the HP lease uncertainty as an overhang on FCOT. In addition, the market should react positively as the change in tenant mix at ATP provides an opportunity raise rents post the completion of the AEI currently undertaken.
"As these issues in our view have been addressed, we believe FCOT’s share price should catch up," says analyst Mervin Song in a Friday report who says both these factors should act as re-rating catalysts.
While consensus has a "hold" call due to concerns that FCOT is ex-growth, DBS believes the acquisition of the Farnborough Business Park (FBP) puts FCOT back on the growth path as the UK now provides a growth avenue.
The UK offers attractive yields relative to the tighter yields for office assets in Singapore and Australia, FCOT’s original core markets. Moreover, with its sponsor expanding into the UK business park space, FCOT has increased its visible acquisition pipeline to over $4 billion.
"Thus, with resumption of growth, we believe FCOT should be accorded a premium as implied by our target price of $1.71," says Song.
After incorporating the acquisition of FBP and $79 million equity raising, DBS is raising its DCF-based target price to $1.71 from $1.55.
Units in FCOT are up 1 cent at $1.52 or distribution yield of 6.5% in FY18.
