Frasers Logistics & Industrial Trust - DBS Research 2018-01-29: A Sexy Growth Story

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FRASERS LOGISTICS & IND TRUST BUOU.SI

Frasers Logistics & Industrial Trust - A Sexy Growth Story

• Frasers Logistics & Industrial Trust's 1Q18 DPU in line with expectations; income visibility high with leases locked in.
• Ample financial capacity to acquire and grow portfolio.
• Pricing in S$200m of acquisitions in our estimates.
• BUY with Target Price raised to S$1.24.

Maintain BUY, Target Price S$1.24.

• We maintain our BUY call, with Target Price revised to S$1.24 as we price in new acquisitions in the coming year. 
• We like Frasers Logistics & Industrial Trust (FLT) for an expected 12% total return underpinned by a growing distribution yield. With an under-geared balance sheet, FLT has the ability to surprise on the upside through acquisitions, which we believe is not included in consensus’ estimates.

Where we differ. Conservative estimates but with a street high Target Price of S$1.24.

• Our estimates are more conservative to account for a potential cut in payout ratio in FY18F, monies which may be utilised as capex or incentives. That said, our Target Price is among the highest, as we believe that the street has yet to fully reflect the resilience of the portfolio and ample growth from acquisitions from Sponsor (14 properties in Australia and potentially more in Europe). 
• Gearing of close to 31% empowers the REIT to acquire.

Steady organic growth.

• 1Q18 DPU of 1.80 Scts was c.3.0% higher y-o-y, driven by acquisitions. 
• Looking ahead, FLT has renewed most of its expiring leases and has only 2.5% of income to be renewed in FY18F, implying that visibility is high.

Valuation

• After rolling forward our valuation, we raised our DCF-based Target Price to S$1.24 from S$1.18.

Key Risks to Our View

• Currency risk. As the Manager pays its distributions in SGD but earns in AUD, the REIT is exposed to currency fluctuations. The manager attempts to reduce foreign fluctuations by hedging distributions regularly.

WHAT’S NEW - Heading on the growth path

Stable rental reversions.

• Revenues and net property income came in 6.9% and 8.9% higher y-o-y to A$42.4m and A$34.8m respectively. This mainly was on the back of an enlarged portfolio (acquisition of 7 industrial properties, and the Beaulieu and Stanley Black & Decker facilities), which had achieved practical completion in 1Q18. Distributable income as a result rose 3.9% to A$25.8m.
• 1Q18 DPU was 2.3% lower y-o-y in AUD terms largely due to the manager taking 78% of fees in units (vs 100% of fees in units) before. Assuming that the REIT takes 100% of the fees in units, 1Q18 DPU would have been 1.75 Scts instead. On a SGD basis DPU was 3.4% higher y-o-y at 1.8 Scts (vs 1.74 scts the year before) due to a stronger AUD hedge rate.

Payout ratio of at least 90% from FY18 onwards.

• While the Manager has paid 100% of distributable income from IPO till end FY17, it intends to have a payout ratio of at least 90% from FY18 onwards. 
• We believe that cash retained might be utilised towards capex or tenant incentives and thus reduce the need by the Manager to fund such initiatives through debt.

Conservative gearing.

• Gearing remains conservative at 30.9% with 68% of borrowings fixed, mitigating volatility from potential fluctuations in borrowing costs. 
• The Manager has significant debt headroom of A$508m to reach 45% gearing level to fund growth initiatives.

Acquisitions to drive growth.

• The Manager continues to look at acquisition opportunities to complement stable organic growth outlook. On that front, we see significant opportunities from the Sponsor from Australia (16 assets, 407,000 sqm of space) and Europe (25 assets, 970,000 sqm) for FLT to tap for growth.

Tweaking estimates to price in acquisitions.

• With ample financial capacity to take on acquisitions coupled with a visible pipeline, we believe that FLT will remain on an acquisition path in 2018. 
• We priced in acquisitions of S$200m to be completed by end FY18. We have assumed that 55% or S$110m will be funded by new equity (priced at S$1.05/unit). In addition, we have also cut our payout ratio assumption to 95%. Overall, our DPUs are bumped up slightly to account for new deals.

Negative rental reversions.

• The REIT forward renewed 3 leases, at an average rental reversion of -5.1% but we understand range from a flattish reversion to a drop of close to 14%, depending on the leasing spreads at the point of renewal.
• Impact on topline is marginal as average portfolio rental escalations of 3.2% will more than compensate the downward renewals of the above leases. We however take comfort that FLT’s income visibility continue to improve with these leases still averaging escalations of 3.0%-3.25% for a further 3-10 years.

AEIs on track.

• The Manager completed the acquisition of 2 development projects and is on track to complete the third property (17 Hudson Court, Keysborough) in May 2018. 
• The Manager has also completed asset enhancement initiatives (AEI) at 57-71 Platinum Street, Crestmead, Queensland ahead of schedule at the end of 1Q18 at a return on cost of c.10%.

Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | Singapore Research DBS Vickers | http://www.dbsvickers.com/ 2018-01-29

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.24 Up 1.180