FRASERS LOGISTICS & IND TRUST
BUOU.SI
Frasers Logistics & Industrial Trust (FLT SP) - 2QFY17 Sunny Side Down Under
- Results are in line with expectations.
- There was a negative 4.9% reversion due to a drag from a single lease. We see minimal lease rollover risk, with a mere 3.8% of portfolio leases due by Dec 18.
- Expect marginal forex gains from FY17 DPU (hedged at near parity to S$), while management could start hedging FY18 DPU this month.
- Maintain BUY with an unchanged target price of S$1.11.
RESULTS
Results in line with expectations, with core 1HFY17 DPU making up 52.2% of our FY17 DPU estimates.
- 2QFY17 DPU of 1.75 S cents exceeded FLT's expectations by 6.7%. 2QFY17 gross revenue and net property income came in 1.6% and 0.3% above the company's forecast (tax levy exemption).
- Distributable income and DPU outpaced the company’s expectations by 5.9% and 6.7% respectively, on the back of lower trust expenses and interest cost savings (borrowing costs 19.8% lower than company’s expectations)
STOCK IMPACT
Proactive management of well spread out lease expiry profile.
- Expiring leases for 2017 and 2018 remain meagre at a respective 0.2% and 3.6% of overall gross rental income (GRI). 2QFY17 overall occupancy remained stable at 99.3% (1QFY17: 99.3%).
Tenant retention remained high at 92.4% (since listing).
- Negative rental revisions in 2QFY17 (-4.9%), mainly dragged down by a single lease (- 8% reversion). The previous sole tenant at this asset (Australian Geographic) paid a surrender fee upon early termination of its lease, which should offset the impact of this quarter’s negative reversions. We note that FLT’s lease expiries over the next two years (until Dec 18) remain marginal at 3.8%.
Potential pickup in FY18 from stronger A$.
- Management indicated that it intends to begin hedging 1HFY18 DPU this month, on a staggered basis. According to management, its hedging costs are around 100bp. Assuming spot rates hold at around S$1.0386/A$1, FLT will likely hedge 1HFY18 DPU at about S$1.0286/AS$1.
- 2QFY17 DPU was hedged at S$1.0014/A$1 (1QFY17 DPU: S$1.00/A$1.00), implying minimal forex gains for FY17 distributions.
Australian entry of online retailer Amazon.
- Management was not unduly concerned with Amazon’s impending entry into Australia (likely 2018-19) impacting its largest tenant Coles (14.2% of portfolio rental). While acknowledging the likely threat, they cited Coles’ steady growth as a mitigating factor.
- We note that the CEO of Wesfarmers (Coles’ parent company) Richard Goyder was also unfazed, pointing out a slew of operational issues (high labour costs, logistics, taxes and distance travelled) that would confront Amazon in Australia.
ROFR asset pipeline.
- This quarter saw an additional asset injected into the pipeline, taking ROFR assets to a total of 15 (collectively valued at around A$350m).
- While FLT’s debt headroom stands at an estimated A$340m (assuming 40% gearing limit), management has not ruled out the likelihood of equity fund raising in future acquisitions.
Rental incentives.
- 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%.
- In Australia, lease incentives also come in the form of fit-out allowances (especially for new leases), besides the typical rent free periods.
Geographical diversification unlikely in the short run.
- Management continued to emphasise its current focus on the Australian market, (primarily Sydney and Southeast Melbourne), 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.
Market outlook.
- Management remains ebullient on Sydney’s leasing prospects, with rental growth observed. We note that the Sydney market has witnessed seven years of rental growth with net rental growth of 4.0% yoy in Mar 17, according to consultant JLL.
- In Melbourne, overall industrial rents remained stable (+1.1% yoy in Mar 17). The Brisbane market remained lacklustre (market rents down 1.7% yoy in Mar 17), owing to exposure to the languishing commodity sector, though we note that FLT has no noteworthy tenant in this industry.
- While management has previously conceded that passing rents from expiring leases are slightly above market spot rents, they have also highlighted defensive measures like asset enhancements and taking shorter-term leases (around 1 year) to mitigate rental pressure.
EARNINGS REVISION/RISK
- None.
VALUATION/RECOMMENDATION
- Maintain BUY with an unchanged target price of S$1.11.
- Our valuation is based on DDM (required rate of return: 7.1%, terminal growth: 1.9%).
SHARE PRICE CATALYST
- Depreciating S$ against the A$.
- Inorganic growth from yield-accretive acquisitions fuelled by healthy debt headroom (A$310m assuming a comfortable gearing level of 40%).
Vikrant Pandey
UOB Kay Hian
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Derek Chang
UOB Kay Hian
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http://research.uobkayhian.com/
2017-05-08
UOB Kay Hian
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