Frasers Property Group - DBS Research 2017-05-30: Winds Of Change


Frasers Property Group - Winds Of Change

  • Frasers Centrepoint Limited and REITs received warm reception in Bangkok.
  • Growth momentum to pick up on the back of an improved operating environment.
  • Acquisitions aplenty among its listed REITs – Frasers Centrepoint Trust (FCT)Frasers Commercial Trust (FCOT)Frasers Logistics & Industrial Trust (FLT) and Frasers Hospitality Trust (FHT).

Frasers Centrepoint Limited and REITs heading to Bangkok. 

  • We hosted a Frasers Property day in Bangkok (BKK), tailored for Frasers Centrepoint Limited (FCL) and its four listed REITs – Frasers Centrepoint Trust (FCT), Frasers Commercial Trust (FCOT), Frasers Logistics & Industrial Trust (FLT) and Frasers Hospitality Trust (FHT)
  • Investors were generally familiar with the group given its regular outreach to investors in Bangkok over the years.

Growth momentum to pick up on the back of an improved operating environment. 

  • Frasers Centrepoint Limited (FCL) and its REITs are expected to deliver consistent returns in the coming years, leveraging on the improved outlook of their key markets of Australia and Singapore. Supported by a solid balance sheet, FCL remains on the outlook for further acquisition opportunities to deepen their exposures and to grow recurring income base. Re-stocking its land bank in Singapore is also a priority as most of its projects are substantially sold.
  • For the REITs, we believe that the bright spots are in the Australian logistics and tourism sectors where FLT and FHT operate in. Given limited incoming supply in the next few years, we believe that they are able to deliver higher returns as demand for logistics space and hotels remains firm. The worst is over for FCT as the refurbishment for Northpoint enters its final phase and will complete by September 2017. Thereafter, we project FCT to deliver a 3% CAGR growth in distributions over FY17F-19F.
  • While uncertainties surround FCOT regarding the renewal of HP lease (18% of revenues) in the coming months, we believe negatives are priced in at 7.5% yield, which is a 150-bp spread against its larger office REITs (vs 100-bp 5-year average). There are levers that the manager can undertake to maintain DPUs and as such, we see limited downside.

Asset recycling activities could turn up. 

  • Asset recycling has been a consistent strategy that FCL employs to maintain high ROEs and deploy proceeds to development projects with higher returns. We see an attractive pipeline of properties that could be tapped across the group’s staple of listed REITs. 
  • Given where a majority of its REITs are trading, we see acquisition opportunities for both FCT and FLT in the immediate-medium term given stabilised assets on the sponsor’s balance sheet.

Frasers Centrepoint Limited (FCL) 

Achieving a substantial base of recurring incomes. 

  • Year 2018 will turn out to be a transformational year for Frasers Centrepoint Limited (FCL) with a number of major commercial projects completing - Northpoint City (retail) and Frasers Towers, a downtown office tower. 
  • We understand that takeups for both projects have been encouraging ahead of completion. Once completed, we expect contribution from both projects to boost its earnings further. This is on top of completions of its portfolio of retail malls - The Centrepoint and Waterway Point which continue to enjoy robust patronage, implying that occupancy rates should remain stable.

Gains from asset recycling into its listed S-REITs to boost share price. 

  • Divesting its stabilised properties to its listed REITs are consistent strategies that FCL undertakes to recycle capital.
  • These corporate actions are generally perceived positively by investors as FCL is able to free up capital which will improve the group’s balance sheet position. Redeploying capital to other development projects with higher returns will improve returns on equity in the medium term.

Navigating pressures on retail sector. 

  • The outlook for Singapore's retail sector remains weak as retailers continue to look to consolidate space, given thinning profit margins on the back of rising cost pressures and e-commerce eating into retail sales. 
  • The group believes that its portfolios of malls are shielded somewhat given its focus on necessity shopping and trades are generally non-discretionary in nature. 
  • In addition, most of its properties are located in mature estates with minimal new supply nearby implying that demand for space at its malls remains high.

Addressing free float. 

  • Major shareholder TCC and Thai Beverage Limited (ThaiBev) holds a substantial c.87% of the stock which limits the stock liquidity somewhat, despite it being close to a S$5bn market cap company. 
  • According to media sources, TCC and ThaiBev could look to restructure their shareholdings in the company and if it involves an improvement in liquidity and free float, this could mean higher prices given heightened institutional interest.

Frasers Centrepoint Trust (FCT) 

Portfolio to stand firm despite supply headwinds. 

  • The large retail supply completing in the next few years is not a major cause of concern for FCT. This is because the locations of its major malls in mature residential districts of Choa Chu Kang (Yew Tee), Woodlands (Causeway Point) and Yishun (Northpoint) have no direct competition in the vicinity.
  • In addition, the manager believes that the REIT’s portfolio of retail malls located at MRT interchanges with strong traffic flows and its positioning to cater mainly to daily necessities of residents in the vicinity will mean that tenants' sales performance will remain stable.

Northpoint City on track for completion by 4Q17. 

  • We understand that the worst is over for Northpoint Mall, with projected occupancy rates to increase sequentially from 2QFY17 onwards. We look forward to the successful integration of Northpoint and its adjacent Northpoint City development, which will complete in 4Q17, in time for opening by Christmas, a traditional peak for the retail sector.
  • The manager maintains its target of achieving 9% higher rents upon completion of the integration of two malls.

Acquisitions - laying the groundwork towards an enlarged portfolio. 

  • One of the manager’s focus is to execute on acquisitions, either from third parties or from the sponsor. On this front, FCT has recently acquired a strata lot at Yishun 10 from a third party which, in our view, will eventually be physically integrated with adjacent Northpoint Shopping Mall.
  • This will need the owner of the remaining strata lots – Golden Village to agree, a possibility in the medium term.
  • Apart from the Sponsor, FCL for acquisition opportunities, the manager sees opportunities from third parties overseas (in Australia and potentially Malaysia). While Singapore remains a core for the REIT, the manager is not ruling out venturing overseas and targets up to 20% of its assets to come from overseas.  

Frasers Commercial Trust (FCOT) 

No further updates from HP. 

  • HP Inc and HP Enterprise currently contribute c.17.7% of group gross rental income (GRI) and lease c.49% of the NLA at Alexandra Technopark (ATP). 
  • Investors have been concerned about both HP Inc and HP Enterprise vacating Alexandra Technopark at the end of their respective leases in September/November 2017, but no update has been given yet.

Levers to mitigate potential loss of income from HP. 

  • FCOT guided that it has several levers to mitigate the loss of income should HP Inc or HP Enterprise leave ATP. FCOT can start paying the management fees in units rather cash. 
  • In addition, the REIT can temper any fall in DPU by paying out the capital gains from the sale of the hotel development site at China Square Central.

AEI at ATP and lack of business park supply. 

  • Despite the uncertainty over the HP leases, FCOT will continue with its AEI plans at ATP. Costing approximately S$45m and commencing in mid-2017, the AEI will involve the creation of a new campus environment. In addition, c.20,000 sqft of space will be relocated from Basement 1 to the ground level to create a new amenity hub. 
  • Improved amenities will include a new food court, food and beverage outlets, a clinic and landscaped garden. Feedback from current and prospective tenants has been positive. 
  • Post the AEI, FCOT is hopeful that it will raise rents from around S$4 psf per month and partially close the gap to the S$5.50-6.00 rents at the nearby Mapletree Business City.

Positive Australian exposure. 

  • Approximately 50% of 2Q17 NPI was sourced from Australia which is positive for the REIT given the embedded annual rental escalations. The majority of FCOT’s Australian leases have average annual step-ups of between 3.0-4.4%. 
  • In addition, FCOT’s Melbourne property 357 Collins Street should benefit from a buoyant office market. According to Knight Frank, Melbourne is among the top five global cities with the best rental growth outlook for the next three years.

Frasers Logistics Trust (FLT) 

Growth outlook for FLT remains firm. 

  • The manager is generally positive on industrial and logistics outlook in Australia, driven by a transition towards more consumption based economy. The lack of new speculative supply in its key markets of Sydney, Melbourne and Brisbane is positive. 
  • With a long weighted average lease expiry (WALE) of 6.7 years and with only 3.8% of its leases to be renewed in FY17-18F implies strong long-term visibility. The rental outlook remains firm with Sydney expected to see the strongest growth, followed by Melbourne and Brisbane.

Acquisitions from Sponsor. 

  • Given a conservative gearing of < 30%, one of the potential surprise to earnings will come from acquisitions, which FLT's sponsor Frasers Property Australia Pty Limited (FPA) is currently warehousing and could inject into the REIT at an appropriate time in the future. 
  • We understand that as of March 2017, potential pipeline of acquisition opportunities stood at 15 properties that have been stabilised, and valued at c.S$350m.

Conservative financial metrics. 

  • The manager intends to apply a consistent strategy to hedge out their currency exposure through forward hedges. FY17 distributions have been hedged at close to parity (SGD-AUD) and will be looking to forward hedge on a 6-monthly basis. The manager also looks to limit interest rate volatility through maintaining a high level of fixed rates (78% as of 2Q17).

Amazon recently announced its launch into Australia has positive implications for FLT, in our view. 

  • We understand that implications for Amazon's entry into Australia is positive for the warehouse sector in the medium term. Amazon is understood to be seeking warehouses to form a distribution hub for its business across the country, which is an opportunity for FLT and FCL to capture, if a partnership is formed. 
  • From FLT’s perspective, while seen to be a disruptor to the traditional retail stores, we believe that FLT could benefit as we see possible spillover demand for quality and modern warehouse space once Amazon's operations ramp up. 
  • Given that the pipeline of new supply remains below its historical mean, we believe that markets should remain on an uptrend.

Frasers Hospitality Trust (FHT) 

Near-term headwinds in Singapore but potential for recovery next year. 

  • Near term, FHT faces the challenge of an oversupplied Singapore hospitality market which has curtailed the ability for its Intercontinental Singapore property to raise average daily rates (ADR) post the refurbishment last year. 
  • For this year, FHT will encounter additional competition from the opening of two upscale/luxury hotels nearby, Andaz and JW Marriott. However, going into 2018 with expected easing of supply, there are prospects for a potential recovery in the Singapore hospitality market.

Positive outlook for hotels in Sydney and Melbourne. 

  • On the back of the growth in international tourist arrivals into Australia and decent domestic economic conditions, FHT’s Sydney and Melbourne hotels should benefit from healthy occupancies and prospects for room rate growth. 
  • In addition, FHT’s Sydney hotels are expected to benefit from the reopening of the Sydney International Convention Centre. 
  • For FY18, FHT’s DPU should be boosted by the contribution from the recent acquisition of Novotel Melbourne.

UK portfolio holding up thus far. 

  • FHT’s UK portfolio continues to hold up with a y-o-y improvement in performance recorded in 2Q17, following the impact of a weak 2Q16 when the London market experienced softer conditions on the back of Brexit concerns and heightened security post the terrorist attacks on continental Europe. RevPAR in 2Q17 rose 11% y-oy.
  • Going forward, FHT remains cautious on its UK performance as the full impact of Brexit is still unknown.

Active capital management. 

  • FHT conducted a S$266m rights issue last year to help partially fund the acquisition of Novotel Melbourne for A$237m. The rights issue also achieved the aim of improving liquidity and market cap of the stock and bringing gearing down towards a more palatable 33% level.
  • The additional liquidity from the rights issue also provided the trust with sufficient debt headroom, in the event there is a significant correction in the GBP post Brexit.

Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2017-05-30
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