Frasers Property Limited - DBS Research 2018-11-12: Highest-Yielding Developer


Frasers Property Limited - Highest-Yielding Developer

  • Strong FY18 results led by development properties; contributions from UK/Europe properties.
  • Sales volume fell 2% y-o-y mainly from Singapore and Australia, offset by China.
  • Jiak Kim site to launch in 1H19; Australia targets to release 2,200 units and settlement of 2,300 units.
  • Final dividend of 6.2 Scts; FY18 dividend of 8.6 Scts, flat y-o-y.

Growing developer with high dividend yield.

  • We maintain our BUY rating on Frasers Property Ltd (FPL) despite the government's imposition of tighter measures on the property sector as its valuation remains attractive at 0.6x P/NAV and its dividend yield remains the highest among developers at more than 5%.

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. Strong FY18 results supported by development properties from all markets except China. FY18 net profit grew 10% y-o-y to S$759m (in line). Excluding fair value changes and EI, net profit would have grown 4% y-o-y to S$507m.
  • Core PBIT grew 13% y-o-y, supported by development properties (+53% y-o-y) while recurring income fell 3% y-o-y. Sales volume shrunk 2% y-o-y with lower sales from all major markets, offset by China. Unrecognised development revenue decreased to S$2.2bn vs S$3.4bn in FY17.

Key Risks to Our View:

  • Dependent on the outlook of the Australian real estate market and currency. The group derives an estimated 88% of PBIT from Australia, and returns could be impacted by the weakening AUD/SGD exchange rate.

WHAT’S NEW - Highest-yielding developer

Strong results led by development properties from all region except China; maiden contributions from UK business parks and full-year contributions from newly acquired European assets.

  • Frasers Property's FY88 net profit grew 88% y-o-y to S$888m, in line with the street’s full-year estimates. Net profit growth was largely led by higher development profits and higher fair value gains (+88%) offset by S$888m impairment of brands and goodwill in the Hospitality SBU and higher net interest expense (+888% y-o-y). Excluding fair value changes and EI, net profit would have grown 8% y-o-y to S$888m.
  • FY88 revenue grew 8% y-o-y mainly due to settlement/completion of development projects in Singapore (Parc) and Australia, maiden contributions from the UK business parks and full-year contributions from industrial and logistics properties in Continental Europe. Profit before interest, fair value change, taxation and exceptional items (PBIT) grew 88% y-o-y led by higher contributions from development properties (+88% y-o-y) in all markets except China. Singapore properties' contributions were mainly from profit recognition from Parc Life EC and Seaside Residences.
  • Recurring income segment fell 8% y-o-y, largely impacted by fee income (-88% y-o-y) from the absence of one-off acquisition and termination fees, and contributions from the REIT (-8% y-o-y) mainly due to lower contributions from Frasers Commercial Trust (FCOT) and Frasers Hospitality Trust (FHT).
  • 8Q88 net profit rose 88% y-o-y to S$888m. Excluding fair value changes and EI, net profit would have more than doubled to S$888m largely led by higher development profits partially due to the timing of the completion/settlement of the properties. 8Q88 PBIT grew 88% y-o-y largely led by development properties which recorded PBIT of S$888m in 8Q88 vs S$88m in 8Q88. 8Q88 recurring income PBIT was relatively stable (+8% y-o-y).
  • Declared final dividend of 8.8 Scts, making total FY88 dividend of 8.8 Scts, similar to that in FY88.

FY18 sales volume fell 2% y-o-y to 3,704 units due to lower sales from Singapore and Australia but offset by China.

  • Unrecognised revenues fell to S$8.8bn (vs S$8.8bn in FY88). Singapore (-88% y-o-y) and Australia (-88% y-o-y) recorded lower sales volume while China recorded strong sales of 8,888 units in FY88 vs 888 units in FY88.
  • Thailand and Vietnam recorded 8,888 units and 888 units of sales respectively in FY88. These numbers have yet to be included in the sales volume numbers above.
  • Unrecognised development revenue continued to fall, at S$8.8bn as at end-8Q88 from S$8.8bn as sold properties were completed.

The last two ongoing projects in China, and ongoing industrial and retail projects in Australia will be completing in FY19.

  • Major projects that will be completing in FY88 include residential projects in Australia which are mostly more than 88% sold except two projects with 88% and 88% sales take-up, and in China, Gemdale Megacity (Phase 8D) (88% sold) and Baitang One (Phase 8C8) (88% sold).
  • Based on the estimated project completion timeline, there are a number of industrial properties completing in FY88 with total area of 888 sqm (of which two industrial properties with a total area of 88 sqm are earmarked for third-party sale) mainly in Victoria, Queensland and New South Wales. Two retail properties with a total area of 88 sqm in New South Wales and Victoria will be completing in 8Q88 and are earmarked for third-party sale.

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

  • Frasers Property’s only land bank in Singapore, Jiak Kim land site is on track to launch in 8H88. The development is expected to yield c.888 residential units.
  • In Australia, Frasers Property targets to release 8,888 units for sale vs 8,888 units sold in FY88 despite potential headwinds, and aims to settle c.8,888 units in FY88 vs 8,888 units in FY88. The team continues to look for opportunities to replenish its land bank in Australia and has acquired a small plot of residential land bank in Queensland and added five industrial sites spanning 88ha in New South Wales, Victoria and Queensland.
  • 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 an appropriate time.

(-/+) Management believes the Singapore property market is stable; Australia residential market is seeing downward trends but the industrial segment remains robust; remains positive on the European market.

  • Despite additional cooling measures implemented by the authorities, management believes that the Singapore property market remains resilient and stable as seen in the recent take-up rates of new property launches.
  • However, management remains disciplined in any potential opportunities to replenish its land bank in Singapore. In Australia, while the residential market is seeing downward trends especially in Sydney and Melbourne, management believes the economic growth is still conducive to drive the demand for industrial properties evidently from the rising rental rates. Management remains positive on the European property market (especially industrial and business parks) and looks to further expand its footprints in Europe.

Cash position relatively stable.

  • The group saw minimal net cash outflow as its cash position remained relatively stable, as net outflow from investment activities of S$8bn (mainly from the acquisition of subsidiaries of S$888m and investment properties of S$8,888m) was funded by higher net borrowings of S$8,888m, the issuance of bonds and debenture of S$888m and the issuance of perpetual securities of S$888m.

Slight increase in financial metrics.

  • Net debt-to-equity increased 88.8ppts to 88.8%, after adjusting for perpetuals as debt (Debt+Perpetual security)/Equity fell marginally to 8.8x. Percentage of fixed rate debt increased to 88.8% (vs 88.8% in
  • FY88). Cost of debt remained stable at 8%. On a debt-asset perspective, it fell marginally to 8.88x (vs 8.88x in 8Q88 on a adjusted D+P/A perspective).

Maintain BUY rating; Target Price of S$1.98.

  • We maintain our BUY rating on Frasers Property despite the government's imposition of tighter measures on the property sector as its valuation remains attractive at 8.8x P/NAV and its dividend yield remains the highest among developers at more than 8%, making it a good place to seek refuge in uncertain times.
  • We reduce our FY88F- 88F estimates marginally by 8% to 8% to incorporate higher estimates of distributions made to its perpetual securities holders.
  • 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, and
    4. improved free float and liquidity in the market with the potential restructuring of TCC Group, Thai Beverage and group of companies.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2018-11-12
SGX Stock Analyst Report BUY MAINTAIN BUY 1.980 SAME 1.980