Frasers Logistics & Industrial Trust - DBS Research 2018-06-25: Going Global

Frasers Logistics & Industrial Trust - DBS Vickers 2018-06-25: Going Global FRASERS LOGISTICS & IND TRUST SGX: BUOU

Frasers Logistics & Industrial Trust - Going Global

  • Accretive acquisition of 21 modern logistics and industrial properties in Germany and the Netherlands a positive.
  • WALE improves to 7.1 years, implying strong earnings visibility. 
  • Gearing inches up to a more optimal 37%.
  • BUY; TP adjusted to S$1.20



Maintain BUY; Target Price S$1.20.

  • We maintain our BUY call, with target price revised to S$1.20 as we tweak our forecasts to account for the recent acquisition of a portfolio of modern logistics properties in Europe and fund raising.
  • We like Frasers Logistics & Industrial Trust (FLT) for an expected 20% total return underpinned by a growing distribution yield.


Where we differ: More conservative estimates than consensus but Target Price among the highest.

  • 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, a prudent strategy. Portfolio gearing level is more optimal at c.37% but still empowers the Manager with flexibility to execute on more acquisitions.
  • With the Manager now casting its targets in Europe and Australia, we see greater opportunities to grow. The Sponsor has a pipeline of close to 1.2m sqm of industrial properties which can be injected in the medium term.


Steady organic growth.

  • The REIT has a weighted average lease expiry of 7.1 years, which is longer than peers'. 
  • FLT has renewed most of its expiring leases in FY18F and FY19F and has only 1.8% and 7.7% of its income to be renewed respectively, which implies that cash flow visibility is high.


Valuation:

  • Our DCF-based Target Price is dropped to S$1.20 from S$1.24 as we refresh our estimates to include the recent acquisitions.


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 - A big step into Europe


Significant acquisition in Europe.

  • Frasers Logistics & Industrial Trust (FLT) recently completed the acquisition of a portfolio of 21 industrial properties located in Germany and the Netherlands (defined as “Europe”). These industrial properties are mainly modern logistics facilities located within major logistics clusters of Germany and the Netherlands which cater to core distribution needs of both countries. These properties are built to high specifications and have an average age of 7.0 years, implying that there is likely minimal need for further capex in the immediate term.
  • The properties are acquired at EUR596.8m (S$972.8m @ EUR1:S$1.63), which is at a 1.2% discount to the appraised value of EUR603.9m (S$984.4m) by independent valuers. The initial yield for the portfolio is estimated to be 5.5%. The purchase consideration of EUR316.2m (S$515.4m) of the portfolio in Europe was funded through a combination of new equity issued (S$328.9m from a private placement, S$147m from a preferential offering and the rest from the novation of onshore debt from the vendor).
  • Post deal, we estimate that FLT’s gearing will increase to a more optimal c.37% level, while higher than before (c.28%), is still at a comfortable level given the REIT’s exposure to multiple geographies. Onshore debt that the Manager has taken will act as a natural hedge against currency volatility.

Quality portfolio with superior attributes.

  • The properties are underpinned by a high quality tenant base which includes the likes of BMW Group, Bakker Logistiek, DSV Solutions and Mainfreight, a majority of which are in the automotive and logistics services sectors. The top 10 tenants comprise a mix of multinational companies with investment grade credit rating and publicly listed companies.
  • According to the independent market research report, net absorption trends for logistics and industrial properties in Germany and the Netherlands are robust driven by limited supply and strong tenant drivers driven by e-commerce activities.

Improved portfolio weighted average lease expiry (WALE).

  • Post acquisition of the European portfolio, FLT’s portfolio WALE will lengthen to 7.1 years, from the 6.8 years currently. This will reduce the REIT’s annual expiry risk and improve income visibility for unitholders. 
  • FLT will only have < 10% of its income expiring till end of FY19.

Deeper and larger pipeline of assets to be acquired.

  • The acquisition will empower FLT with greater access to the Sponsor’s industrial platform in Europe and an expanded pipeline of assets in Australia and Europe. The REIT will have a potential pipeline of 1.2m sqm to be acquired in the medium term, when the opportunity arises.





Derek TAN DBS Vickers | Carmen TAY DBS Vickers | Mervin SONG CFA DBS Vickers | https://www.dbsvickers.com/ 2018-06-25
SGX Stock Analyst Report BUY Maintain BUY 1.20 Down 1.240



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