Frasers Centrepoint Ltd (FCL SP) - DBS Research 2017-04-19: One Foot In Europe’s Logistics Sector

FRASERS CENTREPOINT LIMITED TQ5.SI

Frasers Centrepoint Ltd (FCL SP) - One Foot In Europe’s Logistics Sector

Gaining a foothold in the logistics and industrial market in Europe via M&A.
Acquired company offers strong recurring income visibility supported by long leases.
Potential cross-fertilisation of expertise in development and management of logistics and industrial sector to new markets.

Frasers Centrepoint Limited (FCL) announced that the group will acquire 86.56% of Geneba Properties N.V. (Geneba) for cash consideration of EUR 3.67 per depositary receipt or an aggregate amount of EUR 315.9m (approximately S$471.6m) from Catalyst RE Coöperatief U.A., a private equity firm.
Upon attaining the relevant approvals, FCL will make an all-cash offer for the remaining 13.44% free-float at an equivalent offer price per depositary receipt.
FCL expects to complete the transaction for the 86.56% stake by end of June 2017.

Geneba is a European commercial real estate investment company headquartered in Amsterdam and is listed on the NPEX, the SME Stock exchange in the Netherlands for small and medium-sized companies.
The company manages a predominantly logistics and industrial portfolio located in Germany and Netherlands.
The company was established on 11 July 2013 and commenced business on 27 March 2014.

Geneba has assembled a property portfolio of mainly logistics and industrial buildings worth EUR 493m as of 31 Dec 2016. These properties are leased to large and medium-sized industrial companies under long leases and are mainly mission critical to its tenants.
As of 28 Feb 2017, the portfolio had an average occupancy rate of 98.0% and a weighted average lease expiry (WALE) of 9.5 years. The occupancy rate has remained fairly stable over the years.
Given FCL’s multi-geographical footprint and established track record in development and management of industrial properties from Australia, the group is able to cross-fertilise its capabilities across newly minted markets in Thailand and now, Europe.
When successful, we believe that FCL will be able to establish a ‘grow with customers’ strategy that could result in increased stickiness with tenants in the medium term.

FCL’s purchase price implies a 35% premium to NAV of EUR 233.1m, or 82% premium to the market cap of EUR 173.3m. A back of the envelope calculation implies an acquisition cap rate of 6.4%, which is higher than recent market transactions in the region of c.5.5%.
While premiums are high at first look, we believe that it accounts for
1. income growth and upside to capital values from planned asset enhancement initiatives (AEI) of certain assets,
2. potential capital values given expectations of further cap rate compression against the backdrop of robust market transaction volumes.
It is intended that the group will fund the purchase of Geneba properties with internal resources but we believe that part of the funding could come from potential asset recycling of stable properties in Singapore/Australia to their listed REITs.

Rating: BUY
Price Target 12-mth: S$2.00 (14% upside) (Prev S$2.00)

Derek TAN DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2017-04-19

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