Unit consolidation. Frasers Commercial Trust (FCOT) commenced trading its 5:1 consolidated units on Feb 8, with an opening price of S$0.855 and then closed 1.2 per cent higher at S$0.865.
The market appears to have welcomed the unit consolidation move favourably. Its trading volume that day was 2.21m shares, compared with its average daily volume of 1.28m shares (adjusted for unit consolidation) since its IPO on 30 March 2006.
Recall that the rationale for the unit consolidation cited by FCOT was to (1) improve the market perception and attractiveness of FCOT and its units and (2) reduce the magnitude of volatility of FCOT’s unit trading price and market capitalisation due to the minimum bid and ask spread.
We think management is heading in the right direction with the unit consolidation, which will spur liquidity as well as generate more interest, particularly among institutional investors and fund managers in our opinion. It will also provide more scope for subsequent equity fund raising for acquisitions or asset enhancement initiatives.
Australian Wholesale Property Fund (AWPF). FCOT successfully divested Cosmo Plaza (Japan) on January 18. As a first step, the manager is following through the right strategy of divesting low income-producing assets. We think the next distressed asset that warrants divestiture is FCOT’s 39-per cent interest in the AWPF, which was inherited from its predecessor, Allco Commercial REIT (acquired prior to the financial crisis). AWPF stopped paying out dividends since 3QFY08 and its book value on FCOT’s balance sheet has also dropped from a high of S$75.1m in 4QFY07 to its present S$32.5m in 1QFY11 (56.7per cent decline). We do not see much upside potential for the Sydney assets, and think that the capital could be recycled for better income maximising purposes such as debt pare-down or yield-accretive refurbishments.
Maintain BUY. FCOT is currently trading at a PBR of 0.44x, which is lower than its historical PBR of 0.54x since listing. We reiterate that the high discount is unwarranted, and possibly attributed to a legacy issue (its underperformance) before it was bought over by Frasers Centrepoint Limited in 2008. With a strong sponsor, capable manager and stable income, we remain confident that the management will restructure its portfolio optimally. We recognise that the transformation has progressed slower than expected, partially due to the financial crisis and the doldrums in Japan, but the manager has since made all the right moves in FY2010. Maintain BUY with a revised fair value of S$0.92 (adjusted for unit consolidation).
Lacklustre 2QFY11 results. Raffles Education Corp (REC) reported its 2QFY11 results with revenue dipping 12.2 per cent YoY and 1.9 per cent QoQ to S$41.4m; while net profit fell 19.7 per cent YoY and 3.8 per cent QoQ to S$5.6m. Stripping out exceptional items and forex, net profit would have plunged 52.3 per cent YoY (-6.3 per cent QoQ) to S$4.9m. The disappointing performance can be attributed largely to lower student enrolments for REC’s National Education System (NES) segment as a result of fewer students taking the Gao Kao in China; and also foreign exchange translation losses on the RMB against the SGD. For 1H11, revenue dropped 15.3 per cent to S$83.6m, meeting 44.2 per cent of our FY11 revenue forecast, while net profit declined 45.5 per cent to S$11.5m. Adjusting for exceptional items and forex, 1H11 earnings would stand at an estimated S$10.2m (-62.2 per cent), forming only 25.0 per cent of our full-year earnings forecast. An interim dividend of S$0.0015 per share was declared.
Persistent structural headwinds. The changing dynamics of China’s higher education system continues to take a toll on REC, which is why the management emphasised to us that they are trying to seek growth more quickly from other markets (especially India). We anticipate stronger contribution in 2HFY11 from the new colleges established in FY09, as four out of five of them were set up in 2HFY09. FY12’s earnings are also estimated to pick up as we see better contribution from the eight colleges set up in FY10.
Long-term catalyst potential from OUC. We understand that REC has obtained approval from the relevant authorities to develop residential properties on 280,000 sqm of land in OUC (likely to be a joint venture with a residential developer). We acknowledge that this could reap in substantial returns for REC in the future. However, given that property development is not the core business of REC, we opine that the expertise and experience of the co-developer that REC works with for this joint venture would play a critical factor on the success of this project.
Maintain HOLD. While the growth potential of OUC exists in the future, we would prefer to see a turnaround in its core education system business before turning more positive on the group. Taking into account the still weak student numbers, we see the need to reduce our FY11 revenue and earnings estimates by 5.1 per cent (FY12 by 4.6 per cent) and 33.4 per cent (FY12 by 11.2 per cent) respectively. We have not included any OUC property development contributions in our assumptions yet as we believe the plans are more long-dated. Rolling over our valuation to 18x FY12F EPS, our fair value estimate decreases from S$0.28 to S$0.27. Maintain HOLD.
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