Frasers Logistics & Industrial Trust - DBS Research 2017-07-26: Not Resting On Its Laurels

Frasers Logistics & Industrial Trust - DBS Vickers 2017-07-26: Not Resting On Its Laurels FRASERS LOGISTICS & IND TRUST BUOU.SI

Frasers Logistics & Industrial Trust - Not Resting On Its Laurels

  • Recent equity placement of 78m shares well received at a tight 1.2% discount to VWAP.
  • Proceeds to partly fund recently announced A$169.3m worth of properties in Australia.
  • Attractive deal metrics as portfolio earnings strengthen further.
  • Raising Target Price to S$1.15 from S$1.10.



Maintain BUY, Target Price S$1.15. 

  • Pricing in recent equity raising and proposed acquisition of seven properties in Australia, our Target Price for Frasers Logistics & Industrial Trust (FLT) is raised to S$1.15
  • The stock offers an attractive 14% return backed by a growing yield. 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 increase TP to S$1.15.


WHAT’S NEW


Growth by acquisitions Acquisition of seven properties in Australia. 

Blended yield of 6.4% with long-term income visibility.

  • The seven properties are located in Melbourne (four), Sydney (two) and Brisbane (one). Four properties are completed and income producing, while the remaining three are currently under development but are pre-committed to tenants with strong credit standing on long-term leases. About 75.1% of the gross rental income of target portfolio are leased to multi-national corporations (MNCs).
  • The blended initial yield of 6.4% can be broken down into the following: Four completed properties (yield of 6.83%); three development properties (yield of 6.07%). The target portfolio's weighted average lease expiry (WALE) is 9.6 years and is a fairly young portfolio with an average age of 2.4 years.


Our thoughts: Attractive deal metrics. 

  • We like the metrics of the deal (i.e. long WALE, quality tenant base, accretion to DPUs) and believe that these positives will be supportive by investors and thus see this as a re-rating catalyst for the stock going forward.

Lower yield to account for longer-term WALE. 

  • The target yield of 6.43% is lower than the current portfolio cap rate of 6.9% but we reckon this is mainly due to the longer WALE of the three development properties, which are long in excess of ten years. This is testament to the strength of the underlying tenant business and its prospects in Australia.

Fund raising to part-fund acquisitions. 

  • FLT also recently announced an equity placement of 78m shares at S$1.01/unit, which is at a 1.2% discount to the VWAP, representing one of the tightest discounts that we have seen in recent times. The proceeds are expected to partly fund the proposed acquisition of the seven properties which will be subject to an extraordinary general meeting (EGM) on 26 July 2017.
  • Given the strong response to the equity placement and the positive deal metrics, we believe that the chance of unitholders approving the deal is high. As such, we have updated our estimates to account for the transaction, with DPU FY17-18F estimates raised by 1% to A 6.98 cts and A 7.06 cts.
  • Gearing is estimated to increase marginally to 33% upon completion of the acquisition of the seven properties by the middle of next year. We project DPU growth of c.1-3% over FY19-2020F.


Where we differ. 

  • Consensus estimates are conservative; currency tailwinds and acquisitions could surprise on the upside.
  • We believe that street estimates are conservative given FLT’s strong earnings visibility (WALE of 6.9 years) while the earlier-than-projected completion of the development projects could drive earnings higher. 
  • Moreover, with the strength of the AUDSGD rate, we believe that there could be currency upside when FLT rolls forward its currency hedges.


Positioned to acquire still. 

  • Post-deal gearing to remain at a conservative 33% which means that there is still headroom for acquisitions or any potential asset enhancement initiatives (AEI), which will remain as the key upside to earnings estimates. 
  • We believe that the sponsor’s pipeline of a further 11 properties might be acquired in the medium term.


Valuation

  • BUY maintained, TP S$1.15. 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.





Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2017-07-26
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.15 Up 1.100



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