Frasers Logistics & Industrial Trust - UOB Kay Hian 2016-08-02: Taking Shelter Down Under

Frasers Logistics & Industrial Trust - UOB Kay Hian 2016-08-02: Taking Shelter Down Under FRASERS LOGISTICS & IND TRUST BUOU.SI 

Frasers Logistics & Industrial Trust (FLT SP) - Taking Shelter Down Under

  • FLT is an industrial REIT with an initial portfolio comprising 51 industrial assets in Australia collectively valued at A$1,584.6m.

Taking shelter Down Under from overcast Singapore. 

  • Frasers Logistics & Industrial Trust (FLT) offers the opportunity to invest in an initial pure-play, prime Australian portfolio with an appraised value of A$1,584.6m. 
  • We believe this is especially prescient in the light of supply headwinds threatening domestic industrial REITs, some of which have also opted to venture overseas into Australia, eg Ascendas REIT’s recent S$1b Australian foray.

Best of both worlds in tax efficiency and sponsor leverage. 

  • If successful in obtaining the Managed Investment Trust status, FLT will be subject to a lower 15% headline withholding tax on distributions (up to 30% in Australia without), making it a preferred structure for global investors without disadvantaging Australian investors. 
  • We also opine that potential injection of Singapore assets would yield tax-free distributions which could facilitate long-term diversification, tapping on the sponsor’s development strengths.

Chronic lack of space in operating geographies. 

  • Sydney, Melbourne and Brisbane, which account for 96.5% of FLT’s portfolio asset value, have seen 10-year average take- up of space outpace 10-year average supply, according to industry consultant Jones Lang LaSalle (JLL). This trend of demand outpacing supply is, in JLL’s view, likely to continue, especially in Melbourne and Brisbane (68.3% of FLT’s portfolio asset value).

Tapping on sponsor expertise for growth prospects. 

  • FLT has entered into Call Option agreements to acquire three separate assets from its sponsor, Frasers Centrepoint Limited, which could add about 8% to portfolio value should the option rights be exercised. 
  • Additionally, with a development pipeline of A$850m to be developed over the next five years, the initial portfolio value could see an increase of about 54% if wholly acquired.

Income visibility from built-in rental escalations. 

  • All the assets in the initial portfolio have fixed and/or Consumer Price Index-linked increments. Fixed rental increments, which are built into the existing leases, are in the range of 2.50-3.75% for FY17 ending 30 September, translating into an average annual rental increment of 3.2%.

Potential play on weakening S$. 

  • As a pure-play Australian REIT, FLT derives 100% of its income in Australian dollars, and a weakening Singapore dollar would bode well for the distributable income repatriated back to Singapore.

Initiate with BUY 

  • Initiate with BUY and target price of S$1.08, based on a dividend discount model with a required rate of return of 7.1% and a terminal growth rate of 2.0%.

Derek Chang UOB Kay Hian | Vikrant Pandey UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-02
UOB Kay Hian SGX Stock Analyst Report BUY Initiate BUY 1.08 Same 1.08