Frasers Commercial Trust (FCOT) faces a need to restructure its balance sheet due to 2 factors: (I) lengthen its debt maturity profile, currently at 1.8 years and (ii) improve is gearing position in the event of an asset write-down. We have explored various options appended in our report and believe a combination of a sale of its Japanese assets and equity raising gives a more favorable outcome for the trust. We believe that the current price has largely factored in a need to recapitalize its balance sheet and believe the stock could re-rate once this overhang is removed. Maintain HOLD, TP $0.25.
Recapitalization: Might be key. We note that FCOT needs to strengthen its balance sheet given its gearing of 49%. Options outlined include new equity raisings, asset-for-equity swap with F&N, sale of non-core Japanese assets to pare debtor or a combination of asset sale and equity raisings. We view the last option as least dilutive to existing shareholders.

Short-term re-financing needs. FCOT has outstanding debt of S$620m ($70m in May’09, $550m in Dec’09) expiring in FY09. The quantum of re-financing at a time where the reit is competing with other S-REITs for funds in a tight credit environment will remain top on investor’s minds. We believe that FCOT, leveraging on its strong sponsorship, should have better access to capital than before.

HOLD, TP $0.25. We maintain HOLD, TP$0.25 in anticipation for further directions from management on their strategy going forward. At an FY08F – FY10F DPU yield of 21% - 26% and a low of 0.2x P/BV, we believe that the stock is pricing in a recapitalising of its balance sheet. However, a re-rating of the stock would likely occur only when the actual balance sheet restructuring activity takes place.