Frasers Logistics & Industrial Trust - Starts Aligning For Growth
- 2Q17 DPU of 1.75 Scts in line.
- Low gearing of c.28.9% implies headroom to acquire.
- Sponsor pipeline of 15 properties could be tapped in the medium term, presenting upside to estimates.
Maintain BUY, TP S$1.10.
- We believe that Frasers Logistics & Industrial Trust (FLT) remains attractive with a prospective yield of close to 7.0%.
- With an under-geared balance sheet, FLT has the ability to surprise on the upside through acquisitions, if executed from a myriad of opportunities available from its sponsor.
- Maintain BUY and TP of S$1.10.
2Q17 results ahead of IPO forecasts
- Frasers Logistics & Industrial Trust (FLT) reported a 2Q17 DPU of 1.75 Scts, 6.7% above IPO forecasts.
- This was on the back of a 5.9% rise in distributable income to A$25.1m.
- The main driver of the outperformance came mainly from lower-than-projected interest cost achieved (2.8% vs 3.4% assumed in IPO prospectus).
- Top line and net property income were 1.6% and 0.3% above forecasts. The positive variances mainly came from an exemption for Absentee Landlord Tax Levy by the Victorian State Government for 2017 tax year, offset by provisions for repairs and maintenance for certain leases when extended.
- NAV remained stable at A$0.89 (S$0.95).
Key metrics remain healthy; rental reversion however is negative.
- Stable occupancy of 99.3% as of end-March 2017, which is expected to remain substantially leased going forward, given limited expiries.
- Rental reversion achieved for the quarter is at an estimated -4.5% for renewed leases for the quarter (- 1.68% YTD)
- Retention rate at a high of 92.4%, but would have been 100.0% if not for the surrender of lease by Australian Geographic at 32 Gibbon Road (NSW), which was quickly replaced by Tailored Packaging.
Low leverage empowers REIT to grow
- Its low leverage of 28.9% remains at the lower end of peer average of 33-34%. This implies headroom for acquisitions or any potential asset enhancement initiatives (AEI), which will remain as the key upside to earnings estimates.
- The manager believes that the sponsor remains an attractive source of quality acquisition targets with 15 assets that could be potentially injected into the REIT in the medium term. It is estimated that the pipeline could be valued at close to A$350m.
Potential upside from currency
- Rolling forward hedges. Management will be locking in forward distribution rates. With the Spot A$:S$ rate at S$1.0:S$1.04, we see potential upside to distributions when that happens.
- BUY maintained, TP S$1.10.
- Our TP is based on DCF and we have not assumed any further acquisitions.
- Our TP offers 15% upside to current price.
Key Risks to Our View
- Currency risk. As the manager pays its distributions in SGD but earns in AUD, the REIT is exposed to currency fluctuations. The manager attempts to reduce foreign fluctuations by hedging distributions regularly.