Frasers Logistics & Industrial Trust (FLT SP) - UOB Kay Hian 2016-11-03: 4QFY16 Sunny Side Down Under

FRASERS LOGISTICS & IND TRUST BUOU.SI

Frasers Logistics & Industrial Trust (FLT SP) - 4QFY16: Sunny Side Down Under

Results exceeded Frasers Logistics & Industrial Trust (FLT)’s IPO forecast and our expectation. Despite a well spread out lease profile, management is nevertheless pro-actively looking to forward renew leases expiring in FY18.
Distributable income for FY17 has nearly all been hedged. The acquisition of the third Call Option Property is expected to complete later this month.
Maintain BUY with a higher target price of S$1.11 (previously S$1.08).

DPU of 1.84 S cents for the period exceeded FLT's expectations by 2.8%.
Frasers Logistics & Industrial Trust’s (FLT) gross revenue in 4QFY16 came in 0.8% higher than the company's forecast, while NPI was down 1% due to one-off repairs and maintenance costs for properties with lease extensions or undergoing lease negotiations. The lower finance costs led to both distributable income and DPU (in S cents) exceeding FLT's forecasts by 2.3% and 2.8% respectively.
Results above expectations, with DPU of 1.85 A cents for the period making up 107% of our DPU estimate. As this was hedged at S$0.9971/A$, DPU for the period stood at 1.84 S cents.

FY17 expiring leases are meagre at 0.5% of overall gross rental income (GRI) with management actively looking to forward renew FY18 expiring leases (8.3% of overall GRI). While conceding that expiring rentals from these leases are slightly above the market’s, management also highlighted defensive measures like asset enhancements to boost overall rents and accepting shorter-term leases to mitigate rental pressure.
FY17 distributable income hedged to mitigate forex risk as management was keen to avoid downside risk from currency fluctuations, particularly during the Brexit referendum. We understand that FLT entered into income hedge sometime during the IPO period (21 Jun 16). With the average exchange rate at AS$1.005/A$ during 21-30 Jun 16, gains from the recent strengthening of the A$ against the S$ are likely to be muted. However, FY18 income has yet to be hedged (6-month rolling basis instead).

Property could take place later in Nov 16 as management awaits approval from the authorities. The completion of the acquisition could take gearing to about 31% (assuming fully debt-funded) from current levels of 28.2%, leaving an estimated A$290m in debt headroom (management's comfort gearing level still at 40%).
FLT also has 11 pipeline assets for potential injection from the sponsor (nine at IPO, with leases renewed for two of these assets post IPO).

We understand that FLT offered average rental incentives of 18% for new and renewed leases in 4QFY16. In the Sydney market, rental incentives generally range 12-15%. The Brisbane market has seen rental incentives of 8-15% for new leases, while incentives in the Melbourne market range 20-25%.

Management noted that Australia’s population remains one of the fastest growing among developed countries.
Industry consultant JLL expects population growth to remain resilient at 1.3% p.a. over the next four years. This will likely translate into increased domestic consumption, benefitting tenants like supermarket Coles (14.7% of overall gross rental income), as well as tenants with e-commerce exposure (estimated at 21% by lettable area).

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 into Thailand and Malaysia have not been ruled out.

We introduce FY19 DPU forecast, and slightly tweak FY17 DPU estimate up by 1.8%, factoring in lower borrowing costs.

Maintain BUY with a higher target price of S$1.11 (from S$1.08) as we roll forward our earnings estimates.
We also lower our terminal growth assumptions by 10bp, which mirrors the slowdown in Australia’s long-term inflation growth.
Our valuation is based on DDM (required rate of return: 7.1%, terminal growth: 1.9%).

The S$ depreciating against the A$.
Inorganic growth from yield-accretive acquisitions fuelled by healthy debt headroom (A$347m assuming a comfortable gearing level of 40%)

Derek Chang UOB Kay Hian | Vikrant Pandey UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-03

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.11 Up 1.080