Frasers Property Ltd - DBS Research 2018-02-12: REIT-like Yields With Alpha Returns

SGinvestors.io

FRASERS PROPERTY LIMITED TQ5.SI

Frasers Property Ltd - REIT-like Yields With Alpha Returns

• Frasers Property Ltd's 1Q18 results weak due to absence of lumpy development profits.
• Recurring revenues increasing steadily; unrecognised revenues stand at S$3.3bn.
• Potential recycling activities to boost prices.

Growing developer with high dividend yield. 

• We maintain our BUY rating on Frasers Property Ltd (FPL) as its valuation remains attractive at 0.8x P/NAV. The stock still lags the other large-cap developers, trading close to 1x P/NAV. 
• Frasers Property Ltd's dividend yield remains the highest among developers at c.4.3%.

Where we differ: Poised to benefit from positive sentiment in Singapore property market; free-float improvement a wild card.

• We are the most bullish among consensus and we believe that Frasers Property Ltd will benefit from the recovery in Singapore office market (Frasers Tower – one of the few office buildings in the CBD completing in 2018). 
• Despite its diminishing land bank in Singapore, we believe that any potential land-banking activities will be a positive catalyst. 
• Earnings surprise and NAV upside might come from potential recycling of assets from Waterway Point, Northpoint City and industrial assets in Australia to its REITs which are not priced in at this moment.

Potential catalyst: Improved property sales, asset monetisation and improving free float and liquidity.

1Q18 results down due to lower development sales. 

• Frasers Property Ltd's 1Q18 net profit was down 62% to S$69.2m on the back of absence of lumpy development revenues in China. However, we note recurring income is increasing steadily while recently acquired land bank in Singapore offers medium-term income visibility when launched in the medium term. 
• Unrecognised revenues stands at S$3.3bn, mainly from its projects in Australia.

Valuation

• We maintain our BUY rating; target price of S$2.35, implying a 1x P/NAV. We have not incorporated newly acquired Geneba into our TP.

Key Risks to Our View

• Dependent on the outlook of the Australian real estate market and currency. The group derives an estimated 30% of PBIT from Australia, and returns could be impacted by the weakening AUD/SGD exchange rate.

WHAT’S NEW - REIT-like yields with alpha returns 

Fall in revenues and PBIT mainly from lower sales recognition from China. 

• Frasers Property Ltd (FPL) 1Q18 gross revenue and profit before interest, fair value change, taxation and exceptional items (“PBIT”) decreased by 24% and 31% respectively to S$740m and S$229m. 
• The decline was mainly due to absence of settlements of development projects from China, which are generally lumpy in nature. A year ago, the group recognised Phase 3C1 of Baitang One in Suzhou, which boosted revenue and PBIT by S$318m and S$117m respectively. Cushioning the fall in contribution from China are the
  1. maiden contribution from newly acquired Geneba Properties and four business parks in the UK. Europe recorded PBIT of S$29.4m in 1Q18 and
  2. higher contributions from its Thai associates, Golden Land and TICON. 
• Thailand and Vietnam PBIT increased by 117% to S$14.1m. As a result, attributable profit fell by 62% to S$69.2m, after stripping off one-offs.

Lower development profits from Singapore and hospitality divisions; cushioned by higher contributions from Australia.

• Singapore SBU saw top line increasing by 25% to S$253m while PBIT fell by 12% to S$93m. While the overall revenue increase was due to percentage recognition from North Park Residences, lower contribution from Joint Venture projects resulted in lower associate income, thus saw a drop in PBIT. 
• In Australia, PBIT came in 65% higher mainly due to share of profits of joint venture residential projects, namely Coorparoo Square in Queensland, Centrale in New South Wales and Life, Point Cook in Victoria. 
• The hospitality SBUs saw a 2% increase in revenues to S$211m but PBIT declined 25% to S$37m, which was mainly due to one-off mark-to-market gains of a cross currency swap of S$11m a year ago. Stripping this out, PBIT would have declined by a marginal 2%.

1Q18 sales volume fell 25% y-o-y to 547 units mainly due to Australia (-59% y-o-y); unrecognised revenues at S$3.3bn.

• Despite Singapore (mainly from Parc Life and Seaside Residences) and China (Gemdale, Baitang and Chengdu Logistics Hub) sales volume doubled to 200 units and 102 units respectively, sales in Australia fell 59% y-o-y, recording only 240 units sales. Unrecognised development revenue stood at S$3.3m, mostly from Australia (S$2.1m). 
• Projects that will be completing in FY18 include North Park Residences (97.9% sold as of 31 December 2018 but 100% as of end-January 2018), Park Life (EC) (61.6% sold), residential projects in Australia mostly more than 84% sold, and Gemdale Megacity (Phase 4F) and Baitang One (Phase 3B).

Replenished Singapore land bank with Jiak Kim site; potential asset monetisation to crystallise value. 

• Frasers Property Ltd replenished its Singapore’s land bank with the Jiak Kim land site won via GLS tender in December. The development is expected to yield > 550 residential units. 
• In Australia, it targets to settle c.3,000 units in FY18 and release 2,500 units in FY18. 
• The team continues to look for opportunities to replenish its land bank in Australia. With the listed REITs in Singapore actively looking to grow their AUMs and trading at yields that are conducive for potential asset monetisation opportunities at the appropriate time.

Net cash outflow. 

• The group saw net cash decline by S$485m, mainly on the back of a net outflow from investment activities of S$549m mainly from the acquisition of subsidiaries of S$555m and investment properties of S$168m, partially offset by proceeds from uplift of structured deposits of S$163m. 
• Net cash inflow from financing activities of S$229m due to proceeds from the issuance of bonds and debenture of S$324m offset by dividends paid to non-controlling interest.

Slight increase in financial metrics. 

• Net debt-to-equity increased 13.7ppt to 84.3%, after adjusting to perpetuals as debt (Debt+Perpetual security)/Equity inched up to 2.0x.
• Percentage of fixed rate debt declined marginally to 62.8% (vs 67.4% a year ago). Cost of debt remained fairly stable at 2.9%.
• On a debt-asset perspective, it remains steady at close to 0.45x ( 0.51x on a adjusted D+P/A perspective)

Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2018-02-12

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.35 Same 2.35