Frasers Logistics & Industrial Trust (FLT SP) - DBS Research 2017-06-07: Maiden Acquisitions To Drive Earnings Growth

FRASERS LOGISTICS & IND TRUST BUOU.SI

Frasers Logistics & Industrial Trust (FLT SP) - Maiden Acquisitions To Drive Earnings Growth

Potential acquisition of 7 properties for A$169.3m.
Strong operational metrics with long lease expiry, implying strong earnings visibility.
Accretion to DPU projected; FLT to part-fund acquisition through new equity.

Frasers Logistics & Industrial Trust (FLT) announced the potential acquisition of seven properties from the sponsor, Frasers Property Australia, a subsidiary of Frasers Centrepoint Limited (FCL).
The target portfolio of logistics properties, if acquired, will deepen the current exposure that FLT has in Australia. The properties are located in Melbourne (four properties), Sydney (two assets) and Brisbane (one asset).
The target asset portfolio comes with strong operational metrics and a weighted average lease expiry (WALE) of 9.6 years, longer than its current portfolio. It is also fairly young with an average age of 2.4 years. The acquisition price is A$169.3m, a slight discount to valuation and if including fees and transaction cost will be A$179.5m (inclusive of A$9.5m fees and stamp duties payable).
The blended initial yield of 6.4% is broken down as follows: four completed properties (yield of 6.83%) and three development properties (Yield of 6.07%).

As expected, we like the metrics of the deal (i.e. long WALE, quality tenant base and projected accretion to DPUs).
In addition, an annual escalation rate of 3.1% offers an inbuilt organic growth profile. These attributes are positives which we believe that investors will like, and see this as a re-rating catalyst for the stock.

We note that the target yield of 6.43% is lower than the current portfolio cap rate of 6.9% but we reckon this to be mainly pulled down by the longer WALE of the three development properties, which have lease tenures of 10-15 years.
Post the acquisition of the target portfolio, FLT’s WALE will increase from 6.7 years to 6.9 years.

Pro-forma DPU is expected to increase 1% from 5.33 Scts to 5.38 Scts. This is on the assumption of an estimated 45% of the deal being funded through equity (or estimated S$80m in equity) and all seven properties are income producing upon acquisition. Gearing is estimated to increase marginally to 32%.
Our estimates have not factored in the acquisitions, pending the finalisation of the deal and shareholders’ approval at the company’s EGM. (Current Rating: BUY, Target Price: S$1.10)

Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2017-06-07

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