Frasers Logistics & Industrial Trust - CGS-CIMB 2018-05-08: 2QFY18 Attractive Entry Point Emerging

FRASERS LOGISTICS & IND TRUST SGX: BUOU

Frasers Logistics & Industrial Trust (FLT) - 2QFY18 Attractive Entry Point Emerging

Frasers Logistics & Industrial Trust (FLT)'s 1HFY8/18 DPU of 3.61 Scts (+3.4% y-o-y) was in line with consensus and our expectation, at 50% of our full-year forecast. 2QFY18 DPU of 1.81 Scts was at 25%.
Adjusted NPI rose 8.1% y-o-y. Of which, 6.8% growth was due to the maiden portfolio acquisition of seven Australian properties; 1.3% is due to underlying c.3% step-ups.
Portfolio occupancy:99.4%. It renewed/inked three leases with -7.3% rental reversion.
FLT's unit price has retraced by c.6% since it proposed the portfolio acquisition of 21 European assets. We now see an attractive entry point emerging.

Frasers Logistics & Industrial Trust (FLT)'s 2QFY18 DPU rose 3.4% y-o-y to 1.81 Scts, led by inorganic contribution from the maiden portfolio acquisition of seven Australian properties.
Adjusted net property income (NPI) grew 8.1% y-o-y. Of which, 6.8% growth was due to acquisitions; 1.3% was due to underlying c.3% rent step-ups partially offset by negative reversions in preceding quarter.
Distribution income rose 3.2% y-o-y as higher finance costs and tax eroded NPI growth.
Given a higher hedged rate of A$1: S$1.065 (2QFY17: A$1: S$1), DPU rose 3.4%.

We note that the manager elected to receive 67.5% of management fees in the form of units (2QFY17: 100%). Assuming 100% of management fees had been taken in the form of units, 2QFY18 DPU would have been 1.77 Acts (instead of 1.70 Acts) vs. 1.75 Acts for 2QFY17.

Portfolio occupancy remained full at 99.4% with weighted average lease expiry (WALE) of 6.75 years. FLT renewed/signed three leases (two in Sydney and one in Melbourne) in the quarter with -7.3% rental reversion.
In particular, FLT managed to get Ball and Doggett (Sydney tenant) to expand and extend its lease for 10 years. The Ball and Doggett lease was originally due to expire in 2021. With these renewals, a minimal 1.1% of gross rental income (GRI) is due in FY18, and 10.3% in FY19.

Gearing improved to 30.5% as at end-2QFY18 (1QFY18: 30.9%). Finance expenses increased 17% y-o-y due to higher borrowings for the Australian portfolio acquisition.
Weighted average cost of debt also increased 10bp q-o-q to 2.9% p.a. as FLT sought to hedge more borrowings at fixed rate. 85% of borrowings are hedged vs. 68% in 1QFY18.

FLT’s unit price has retraced by c.6% since it proposed the portfolio acquisition of 21 European assets from sponsor for c.S$1bn. While we are cognisant of the overhang from the sizeable equity fund raising, the relative mild accretion vs. the deal size and higher gearing post-acquisition, we now see an attractive entry point emerging.
Post-acquisitions, both FLT and MLT would have comparable gearings; FLT trades at 7.2% FY19F yield (reverting to mean) vs. MLT’s 6.3%.

We remind investors that FLT is acquiring prime assets with positive market dynamics. Diversification benefits aside, the larger asset under management (AUM) could lead to a re-rating.
We maintain our ADD call with an unchanged DDM-based Target Price S$1.24.
Downside risks could be higher rate hikes, adverse forex movements and downturn in Australian/European industrial markets.

YEO Zhi Bin CGS-CIMB | LOCK Mun Yee CGS-CIMB | https://research.itradecimb.com/ 2018-05-08

SGX Stock Analyst Report ADD Maintain ADD 1.240 Same 1.240