Frasers Property Group - DBS Research 2018-04-13: Enriching Your Portfolio’s Soul

Frasers Property Group - DBS Vickers 2018-04-13: Enriching Your Portfolio’s Soul FRASERS PROPERTY GROUP FRASERS PROPERTY LIMITED TQ5.SI FRASERS CENTREPOINT TRUST J69U.SI FRASERS COMMERCIAL TRUST ND8U.SI FRASERS HOSPITALITY TRUST ACV.SI FRASERS LOGISTICS & IND TRUST BUOU.SI

Frasers Property Group - Enriching Your Portfolio’s Soul

  • Potential re-rating catalysts on the horizon for Frasers Property Limited (FPL) and its listed REITs.
  • Europe a key investment focus for the Frasers Group given attractive yield spreads on offer.
  • Perceived lack of liquidity an opportunity.
  • Positive outlook for Frasers Property Limited and its REITs still warrants BUY recommendations.



Blooming outlook. 

  • Similar to the cherry blossoms, the Frasers Group is blooming with several catalysts to drive the respective stocks higher, as we learnt from hosting Frasers Property Limited (FPL) and its stable of REITs for a Frasers Day in Seoul. These include the expected upturn in the Singapore residential market for FPL and the potential recycling of retail, industrial and business park assets to its REITs. 
  • These potential DPU-accretive transactions for FPL’s REITs are not only expected to accelerate the growth profile but the higher growth outlook should mitigate the impact of rising interest rates which is a common investor concern. 
  • Furthermore, acquisitions made by FPL’s REITS are likely to be funded via equity raisings which should increase the liquidity of these REITs and in turn result in yield compression over the medium term.


Attractive opportunities in Europe. 

  • A common theme we also gleaned from the investor presentations by FPL, FCOT, FHT and FLT was UK/Europe being a core pillar or a source of potential acquisitions. This arises from the fact that Europe is on the recovery path and the majority of properties there are freehold unlike Singapore where properties are on 30- to 99-year leasehold land. 
  • Furthermore, the low costs of debt present attractive yield spreads which are difficult to achieve in other key markets such as Singapore, Australia or China.


Liquidity premium unjustified. 

  • Some investors have been reluctant to invest in FPL and its listed REITs due to their relatively lower liquidity compared to other property counters. However, the large liquidity premium is unjustified given the healthy outlook for FPL (2-year earnings CAGR of 27%), FLT (c.5% DPU growth) and FCT (c.5% DPU growth). 
  • The yields for FPL’s REITs are also above their peers and historical averages. For example, FCOT’s yield spread to the large-cap REITs stands at c.2% versus historical 0.8% average, while FHT trades at a 0.7% premium to its peers (0.5% average). Thus, we maintain our bullish stance and retain our BUY calls on 



Frasers Property Limited (SGX: TQ5)


Key Highlights

  • Has a stable and recurring income stream from the its property assets representing 78% of operating profit before interest and tax in 1Q18.
  • Diversified exposure across different countries (more than 60% of earnings generated outside of Singapore) and exposure not only to residential but also the office, hotel, retail and industrial sectors.

Growth Drivers

  • Further deepening of presence in Europe via the purchase of business parks in UK and warehouse/properties in Germany.
  • Replenishment of land bank in Singapore which provides leverage to the upturn in the Singapore residential property market.

Risks

  • Slower-than-expected increase in the residential prices in Singapore and slowdown in the Australian market may result in lower-than-expected profits or even losses.
  • However, this risk is mitigated by high land prices for developments near FPL’s projects and in Australia projects targeting local domestic buyers.
  • Net debt-to-equity ratio of 84.3% which is high compared to other listed developers in Singapore. However, this can easily be pared down should FPL recycle its assets into its stable of REITs.

Potential upcoming newsflow

  • Potential acquisition of additional land bank in Singapore.
  • Disposal of properties such as Waterpoint/Northpoint to FCT, and European logistics and business parks to FLT and FCOT respectively.


Frasers Centrepoint Trust (FCT) (SGX: J96U)


Key Highlights

  • Resilient earnings profile given it owns suburban malls.
  • Its two key properties Causeway Point and Northpoint are located in the Northern region of Singapore which is enjoying strong population growth and limited competition. In addition, these two properties are located at major transport hubs which provide strong footfall traffic to the malls.
  • FCT has a strong track record of AEIs delivering doubledigit returns, as seen with the refurbishments conducted at Anchorpoint, Northpoint, Causeway Point and Northpoint.

Growth Drivers

  • Near-term boost in earnings upon the completion of the AEI at Northpoint as occupancy recovers and the property benefits from higher rents.

Risks

  • Decline in retail sales from increased penetration of ecommerce in Singapore and higher spending by Singaporeans overseas which translates into weaker demand for retail space and a decline in rents. This risk is partially mitigated by FCT’s key properties being dominant malls in their submarkets.

Potential upcoming newsflow

  • Potential acquisition of Waterpoint and/or Northpoint City extension should its sponsor decide to dispose these assets.
  • Expansion into Australia but this is subject to having well-located assets with upside potential being available for sale at a reasonable price.


Frasers Commercial Trust (FCOT) (SGX: ND8U)


Key Highlights

  • With a recovery in the Singapore office market, FCOT is well positioned to ride the uptrend.
  • 37% of leases have inbuilt step-up rents which provide for steady organic DPU profile.
  • The UK business market outside London that FCOT has expanded into is typically a stable market as new supply is only built with clear demand and there is limited speculative build.

Growth Drivers

  • Near-term earnings uplift from the recent acquisition of Franborough Business Park in the UK.
  • Completion of S$45m asset enhancement initiative (AEI) at Alexandra Technopark in mid2018 should enhance the competitive position of the property. This should translate into higher occupancies and rents going forward.

Risks

  • Given FCOT has exposure to UK and Australia, the REIT is exposed to changes in the AUD and GBP exchange rates. This risk is managed with AUD and GBP borrowings and hedging the income.
  • Weaker-than-expected rents in FCOT’s three key markets would pose downside risks to earnings. However, the geographically diversified portfolio should help temper any downturn or weakness in any single market.

Potential upcoming newsflow

  • Updates on new tenants at ATP (30.5% of 1Q18 NPI) taking up space vacated by HP.
  • Potential further deepening of its presence in UK as the expansion into UK has now doubled its acquisition pipeline.
  • UK/Europe is the third largest market for FCOT’s sponsor.


Frasers Logistics & Industrial Trust (FLT) (SGX:BUOU)


Key Highlights

  • FLT’s portfolio weighted average lease expiry (WALE) of 6.79 years is among the longest in the S-REIT market and provides for clear and stable cashflow profile.
  • The key markets Sydney and Melbourne, while experiencing new supply growth that is above the tenyear average, are also experiencing strong demand which has translated into healthy increases in prime grade net face rents.
  • FLT has a strong acquisition track record having grown its portfolio from 51 properties at listing to 61 properties currently.

Growth Drivers

  • The inbuilt organic rental escalations of 3.1% per annum underpin a steady DPU profile.
  • Near term, FLT should benefit from acquisitions made over the past 12 months.

Risks

  • As FLT sources 100% of its income in AUD, its DPU is subject to volatility in AUD/SGD exchange rate. This risk is managed via rolling FX hedges.
  • There is potential for negative rental reversions as seen in the last quarter’s financial results owing to overall market rents falling or rising at a slower pace than the annual inbuilt rental escalations such as the Brisbane market. However, the rental reversions remain a small proportion of FLT’s overall portfolio.

Potential upcoming newsflow

  • Further acquisitions in Australia as it leverages on its sponsor’s development pipeline. There currently are 16 properties for which the sponsor has extended the right of first refusal (ROFR).
  • FLT’s sponsor has been expanding in Europe. This presents a potential opportunity for FLT should it decide to expand its portfolio geographically and there are DPUaccretive targets available from third parties or its sponsor.
  • FLT has ROFR over 25 properties in Europe.


Frasers Hospitality Trust (FHT) (SGX:ACV)


Key Highlights

  • Geographically diversified portfolio with 15 hotels located in key global gateway cities in Australia (40% of 1Q18 NPI), Singapore (21%), Japan (15%), Malaysia (6%), Germany (5%) and UK (13%). This provides earnings resilience and mitigates against any downturn in any particular market.
  • Has the best of both worlds, with a suite of its sponsor’s accommodation brands as well as those from international hotel groups such as Accor, Marriott and IHG.

Growth Drivers

  • Near-term earnings should benefit from the expected upturn in the Singapore hospitality market as supply pressures ease.
  • While the Sydney market should slow down from the very strong RevPAR performance over the past few years, due to the reopening of its convention centre and continued growth in the number of inbound tourists, RevPAR performance should remain on a healthy trend.
  • Furthermore, the Australian operations should gain from the completion of renovations at Novotel Sydney Darling Square, which should deliver better room rates ahead.

Risks

  • Potential headwinds in FHT’s UK operations due to Brexit. The business may experience slowing corporate demand and negative impact from a depreciating GBP. Profitability may also be impacted by an increase in the minimum wage.
  • These headwinds should however be partially mitigated by growing leisure demand on account of a weaker GBP and uplift post the AEI at Best Western Cromwell London, which will be rebranded into an ibis Styles property.
  • FLT’s Japanese property in Kobe may face softer demand due to increased competition from hotels in Osaka which is only a short train ride away.

Potential upcoming newsflow

  • Finalisation of potential AEIs at various properties such as ANA Crowne Plaza Kobe, Park International London and Novotel Melbourne on Collins.
  • Potential acquisitions in Europe as FHT’s gearing is relatively low at 33%.







Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2018-04-13
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