Frasers Property - DBS Research 2018-08-13: Lighthouse In The Storm

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FRASERS PROPERTY LIMITED SGX:TQ5

Frasers Property - Lighthouse In The Storm 

• Frasers Property’s 9M18 core PBIT was stable, supported by development properties mainly from Singapore.
• Sales volume fell 28% y-o-y with lower sales from all major markets, especially Australia.
• Jiak Kim site to launch in 1H19.
• Frasers Tower achieved TOP in May 2018.

Growing developer with high dividend yield.

• We maintain our BUY rating on Frasers Property Ltd (FPL) despite the government implementing tighter measures on the property sector as its valuation remains attractive at 0.7x P/NAV and its dividend yield remains the highest among developers at c.5%.
• We raised our Target Price to S$1.98 (from S$1.90), rolling forward our estimates to include FY2020F.

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Where we differ: Defensive play with low exposure to Singapore property and high dividend yield.

• We believe Frasers Property is a good defensive play within the sector as it has low exposure to Singapore’s residential property market (~5%; Jiak Kim land site). 
• In addition, with the recent de-rating in share price, Frasers Property currently offers a dividend yield of over 5%, the highest among the developers and comparable to the REITs.

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

• Frasers Property’s 9M18 core PBIT stable supported by development properties mainly from Singapore. 9M18 net profit fell 10% y-o-y to S$399m, mainly due to higher net interest expense (+146% y-o-y) largely from S$125m costs on its bond redemptions.
• Core PBIT remained relatively stable, supported by development properties while recurring income fell 5% y-o-y. Sales volume dropped 28% y-o-y with lower sales from all major markets, especially Australia.

Valuation: 

• We maintain our BUY rating; raised target price to S$1.98 from S$1.90, rolling forward to include FY2020F. 
• Our Target Price is based on 35% discount to RNAV.

Key Risks to Our View: 

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

WHAT’S NEW - A beacon in the dark

Fall in net profit led by higher interest costs; PBIT remained stable supported by development properties mainly in Singapore.

• Frasers Property’s 9M18 net profit fell 10% y-o-y to S$399m, 80% of the street’s full-year estimates. Excluding fair value changes and EI, net profit contracted 17% y-o-y to S$360m. The lower net profit was mainly due to higher net interest expense (+146% y-o-y) from S$125m costs on redemption of its 7-year and 10-year bonds, higher debt to fund acquisitions and interest expenses for Northpoint City and Frasers Tower are recognized in P&L post completion.
• Frasers Property’s 9M18 revenue fell marginally by 4% y-o-y mainly due to lower revenue recognised from Phase 3B of Baitang One, Suzhou in 9M18 vs revenue recognised from Phase 3C1 of Baitang One, Suzhou and Vauxhall Sky Gardens, UK in 9M17. However, profit before interest, fair value change, taxation and exceptional items (“PBIT”) remained relatively stable (+1% y- o-y) led by higher contributions from development properties (+8% y-o-y) mainly from Singapore properties (profit recognition from Parc Life EC and Seaside Residences).
• Frasers Property’s recurring income segment fell 5% y-o-y, largely impacted by fee income (-49% y-o-y) from the absence of one-off acquisition and termination fees, and contributions from the REIT (-6% y-o-y) mainly due to lower contributions from Frasers Commercial Trust (FCOT) and Frasers Hospitality Trust (FHT).
• Frasers Property’s 3Q18 net profit rose 9% y-o-y to S$198m. Excluding fair value changes and EI, net profit would have fallen 9% y-o-y to S$167m due to higher net interest expense (+112% y-o-y) as explained above. Similar to 9M18 trends, 3Q18 PBIT remained relatively stable (+1% y-o-y) while revenue fell 3% y-o-y.

9M18 sales volume fell 28% y-o-y to 2,100 units mainly due to Australia (-33% y-o-y); unrecognised revenues fell to S$2.7bn.

• All three major markets (Singapore, China and Australia) recorded lower sales volume with Australia falling the most (-33% y-o-y) and achieving only 1,200 units vs 1,800 units in 9M17, followed by China (-29% y-o-y) and Singapore (-17% y-o-y).
• Unrecognised development revenue fell to S$2.7bn from S$3.1bn as at 2Q18 as Singapore project, Seaside Residences progresses in its construction works and Jiak Kim site has yet to be launched. 
• Major projects that will be completing in 4Q18 include North Park Residences (100% sold), and residential projects in Australia mostly more than 95% sold except two projects with less than 60% sales take-up, and Gemdale Megacity (Phase 4F) (99.4% sold).

Jiak Kim site expected to launch in 1H19; potential asset monetisation to crystallise value.

• Frasers Property’s only land bank in Singapore, Jiak Kim land site is expected to be launched in 1H19. The development is expected to yield > 550 residential units.
• In Australia, as at 9M18, Frasers Property had settled close to 2,000 units vs its target of 3,000 units in FY18. As at 9M18, Frasers Property had released 1,250 units or 68% of its lowered target of 1,850 units in FY18. 
• Frasers Property has reduced its FY18 targeted launch units from 2,500 units in the beginning of the financial year to 1,850 units now. The team continues to look for opportunities to replenish its land bank in Australia.
• The listed REITs in Singapore are actively looking to grow their AUMs and are trading at yields that are conducive for potential asset monetisation opportunities at the appropriate time.

Slower demand expected in Singapore and Australia property market; continue to build recurring income.

• While management acknowledged that there are potential headwinds in the Singapore and Australia property markets, management continues to believe that its products are unique and differentiated, and will have its own niche given its track record of delivering good quality. 
• Management remains positive as it continues to build recurring income and optimise the balance sheet via asset recycling.

Net cash outflow.

• Frasers Property saw net cash decline by S$178m, mainly on the back of a net outflow from investment activities of S$1,799m mainly from the acquisition of subsidiaries of S$696m and investment properties of S$1,228m, partially offset by proceeds from uplift of structured deposits of S$58m and dividend income from JV and associates of S$76m.
• Net cash inflow from financing activities of S$1,799m was largely due to proceeds from the issuance of bonds and debenture of S$483m, proceeds from the issuance of perpetual securities of S$340m and higher net borrowings of S$1,244m offset by dividends paid (S$476m).

Slight increase in financial metrics.

• Frasers Property’s net debt-to-equity increased 18.7ppts to 89.3%, after adjusting to perpetuals as debt (Debt+Perpetual security)/Equity inched up to 2.4x.
• Percentage of fixed rate debt increased to 74.8% (vs 67.4% in FY17). Cost of debt remained stable at 3%.
• On a debt-asset perspective, it fell marginally to 0.53x (vs 0.54x in 2Q18 on a adjusted D+P/A perspective).

Maintain BUY rating; raised Target Price to S$1.98.

• We maintain our BUY rating on Frasers Property despite the government implementing tighter measures on the property sector as its valuation remains attractive at 0.7x P/NAV and its dividend yield remains the highest among developers at c.5%, making it a good place to hide in uncertain times.
• We increase our Target Price to S$1.98 from S$1.90, rolling over our estimates to include FY2020F. We reduce our FY18F estimates by 6% to incorporate the higher costs on redemption of its bonds.
• Key catalysts include
  1. potential asset monetisation from ongoing strategies to crystallise value across its portfolio including Northpoint and Waterway Point,
  2. improved property sales across its major markets,
  3. positive changes in government policies,
  4. improved free float and liquidity in the market with the potential restructuring of TCC Group, Thai Beverage and group of companies.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-08-13

SGX Stock Analyst Report BUY Maintain BUY 1.98 Up 1.900