Frasers Logistics & Industrial Trust - CIMB Research 2018-04-20: Bratwurst And Shiraz Are An Umami Combination

Frasers Logistics & Industrial Trust - CIMB Research 2018-04-20: Bratwurst And Shiraz Are An Umami Combination FRASERS LOGISTICS & IND TRUST BUOU.SI

Frasers Logistics & Industrial Trust - Bratwurst And Shiraz Are An Umami Combination

  • Frasers Logistics & Industrial Trust (FLT) has proposed the acquisition of 17 properties in Germany and four in the Netherlands for €596.8m (S$984.4m), or entry NPI yield of 5.5%.
  • We think that Germany and the Netherlands industrials share similar dynamics with Australia’s, the trio are peaking markets from a property-clock perspective.
  • Acquisition metrics also tick the right boxes as the portfolio is predominantly freehold, modern assets, 100% occupied, has quality tenants and long WALE of eight years.
  • The manager expects 1.7% DPU accretion. It also assumes 493.6m new units issued at S$1/unit to arrive at this number.
  • We think that FLT’s investment thesis would not alter significantly with this diversification. Maintain ADD with unchanged DDM-based Target Price.



Makes a beachhead in Europe 

  • Frasers Logistics & Industrial Trust (FLT) has proposed the acquisition of 21 industrial properties in Germany and the Netherlands (total GFA of 595k sqm) for €596.8m (S$972.8m), or entry NPI yield of 5.5%. Essentially, the bulk of the Geneba platform would be injected into the REIT. 
  • Recall that sponsor FCL acquired Geneba in 2H17. The acquisition is expected to be DPU-accretive and completed by Jun 2018. Post-acquisition, AUM is expected to grow from A$1.9bn to A$2.9bn; Australia would account for 67% of AUM while Europe, 33%.


German Bratwurst and Australian Shiraz are an umami combination 

  • While FLT’s entry into Europe came sooner than what many anticipated, and some feared that its Australian story could be diluted, we point out that Germany and Netherlands industrials share similar dynamics with Australia’s, and are peaking markets.
  • The two markets benefit from GDP growth, rise of e-commerce and are key logistics hubs. Also, the sponsor did not materially gain from this divestment at just €7.6m of gains. Last, FLT can leverage its sponsor’s European team to manage the assets.


Acquisition metrics tick the right boxes 

  • The portfolio is predominantly freehold, 100% occupied, has quality tenancy covenants and enjoys long WALE of eight years (increases portfolio WALE from 6.8 years to 7.1).
  • Also, the bulk of leases have CPI-linked indexation. Effectively, the leases have average annual step-up of 1% p.a. vs. Australian leases which have average 3% increase. Also, European leases have longer tenures and lower incentives. Because of where spot rents are, renewals could positively revert (Australian leases revert negatively).


Manager expects 1.7% DPU accretion 

  • The manager expects 1.7% DPU accretion (higher than FLT's first portfolio transaction, which was estimated at 0.9% accretion). The total transaction cost is €325m. 
  • As with the manager’s pro forma illustration, we assume that 493.6m new units would be issued at S$1/unit; the balance of transaction cost would be funded by debt. Post-acquisition, gearing is expected to increase from 30.9% to 36.8%.


Maintain ADD 

  • We raise our FY18F-20F DPU by 0.6-1.1% as we factor in the acquisition and potential equity fund raising. 
  • Overall, we are positive on the acquisition. We believe that Australian and Germany industrial markets are on the same page, and the diversification would not substantially alter the investment thesis for FLT. 
  • Maintain ADD with an unchanged DDM-based Target Price (S$1.24)
  • Downside risks could be higher rate hikes and adverse forex movements.


The numbers behind the acquisition 

  • The agreed purchase price for the 21 industrial properties is €596.8m (S$972.8m), 1.2% discount to independent valuation. The purchase consideration is €316.2m, adjusted for the net assets and liabilities of the target company which in turn, holds the 21 properties. 
  • FLT will also assume the existing €262.7m debt of the target company.
  • Further, we assume:
    1. 5.5% NPI entry yield
    2. 90% NPI margin
    3. 2% borrowing cost for the existing debt, noting that there is scope to progressively lower cost of debt with future refinancing
    4. 12% effective tax FLT will continue to hedge foreign-sourced income on a six-month rolling basis.




YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2018-04-20
SGX Stock Analyst Report ADD Maintain ADD 1.240 Same 1.240



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