Frasers Logistics & Industrial Trust (FLT SP) - UOB Kay Hian 2016-09-09: Investor Luncheon With Management

Frasers Logistics & Industrial Trust (FLT SP) - UOB Kay Hian 2016-09-09: Investor Luncheon With Management FRASERS LOGISTICS & IND TRUST BUOU.SI

Frasers Logistics & Industrial Trust (FLT SP) - Investor Luncheon With Management

  • During our investor luncheon with management, investor queries were centred on growth prospects, operating environment, sector outlook as well as lease profile management and potential geographic diversification. 
  • FLT continues to offer the best growth potential (10% 3-year CAGR) among the REITs under our coverage on top of a high 6.8% yield. 
  • Re-iterate BUY with an unchanged target price of S$1.08.



WHAT'S NEW

  • We hosted the management of Frasers Logistics & Industrial Trust (FLT) to an investor luncheon. Queries were centred on growth prospects, operating environment, sector outlook and supply/demand dynamics as well as lease profile management and potential geographic diversification.


STOCK IMPACT


Growth prospects remain sanguine. 

  • Acquisition of pipeline assets and asset enhancement were flagged as growth engines. Of FLT’s nine right of first refusal (ROFR) completed assets, two have had their leases extended while a third asset is currently in advanced stages of lease extension. 
  • Recall that these nine completed assets (valued at A$170-180m) were originally excluded from the IPO portfolio due to their low average weighted lease to expiry (below two years). 
  • Of the development pipeline, about A$130m in assets are currently under construction (total of A$850m to be constructed over the next five years, mostly in Brisbane and Melbourne). We also note that FLT’s third Call Option asset is slated for completion by the end of this month.

Sector outlook. 

  • Management opined that Sydney remained its most resilient market in terms of rental growth, with limited supply due to high land costs. 
  • The Brisbane market, being relatively more exposed to the resources sector, is currently seeing spot rents beginning to dip, though we note that the mining sector only accounts for 1% of FLT’s tenant base. 
  • In Melbourne, while noting that Southeast Melbourne had higher potential for rental uplift by virtue of more constrained land supply, management was less sanguine on West Melbourne, acknowledging relatively higher land supply. We note that none of FLT’s West Melbourne leases are expected to expire in the next three years.

Demand underpinned by fast growing population. 

  • Management noted that Australia’s population remained one of the fastest growing among developed countries.
  • Industry consultant JLL expects population growth to remain resilient at 1.3% pa over the next four years. This will likely translate to increased domestic consumption, benefitting tenants like supermarket Coles (15.6% of FLT’s rental income), as well as tenants with ecommerce exposure such as Australia Post (total e-commerce exposure estimated at about 21% by lettable area).

Existential barriers to entry. 

  • In response to queries on the operating environment given the nascent entry by S-REITs into Australia and their lower costs of funding, management highlighted its long-standing relationships with tenants and a larger dedicated team on the ground. They pointed out that Singapore REIT managers typically employ industry consultants which may result in market knowledge gaps by comparison.
  • In addition, Australia’s largest developers (Dexus) usually develop assets to suit their own needs and are less likely to build speculatively. This should limit acquisition opportunities for S-REITs and other funds.

Forex movements. 

  • Management also noted that the Reserve bank of Australia kept interest rates on hold in September, following its 25bp rate cut last month. 
  • Coupled with the Monetary Authority of Singapore’s impending monetary review in October, we opine there could be scope for depreciation of the SGD against the AUD, which would bode well for distributable income, which is wholly in AUD.

Pro-active management of expiring leases. 

  • As of Dec 15, about 10.7% of leases by rental income are due in FY18 (only 0.9% due in FY16-17). Management has highlighted that it was already pro-actively renewing leases due for expiry in FY18, in a bid to lock in tenants and de-risk lease profile management. 
  • Additionally, certain lease agreements require a review of 12 months before the lease is due or contain built-in renewal options.

Rental incentives. 

  • In Sydney, rental incentives range from 0-12%, with a few leases as high as 15%. Brisbane has seen rental incentives of 8-15% for new leases, while incentives in Melbourne range from 15-25%.

Geographic diversification unlikely in the short run. 

  • Management continued to emphasise its current focus on the Australian market, pointing to the healthy pipeline of acquisition opportunities within the country. 
  • In the longer term, potential areas of expansion like Thailand and Malaysia have not been ruled out.

Addressing tax leakage implications for Australian investors. 

  • Questions were raised on the potential tax implications on Australian investors. Management was emphatic that while distributions would be taxed at source (Australia), this would not necessarily disadvantage Australians as they can apply to have their tax credits offset the headline withholding tax.

Dual-currency listing does not pave the way for dual listing. 

  • Management clarified that the dual currency listing was solely aimed at improving flexibility for investors. A dual listing on the ASX is unlikely to be on the cards due to the high costs involved, taking into account compliance requirements.


EARNINGS REVISION/RISK

  • We retain our earnings estimates.


VALUATION/RECOMMENDATION

  • Maintain BUY with an unchanged target of S$1.08, based on DDM (required rate of return: 7.1%, terminal growth: 2.0%).


SHARE PRICE CATALYST

  • Depreciating SGD against the AUD.
  • Inorganic growth from yield accretive acquisitions fuelled by healthy debt headroom (A$319m assuming comfortable gearing level of 40%).




Derek Chang UOB Kay Hian | Vikrant Pandey UOB Kay Hian | http://research.uobkayhian.com/ 2016-09-09
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.08 Same 1.080



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