Frasers Property Limited - DBS Research 2019-03-21: The Greatest Showman


Frasers Property Limited - The Greatest Showman

  • Frasers Property Limited (SGX:TQ5) acquiring another 29.99% stake in PGIM Real Estate AsiaRetail Fund for S$601.5m, at a price only marginally higher than the last acquisition; cost of total acquisition amounts to S$958m.
  • Total effective stake (including Frasers Centrepoint Trust (SGX:J69U)’s stake) increases to 54.9% from 24.3%.
  • With a controlling stake, the strategy to “double down” as one of Singapore largest retail landlords is unfolding.
  • Potential divestment of non-core assets (such as Liang Court) will provide near-term earnings lift.

What’s New

  • Frasers Property Limited (SGX:TQ5) announced the acquisition of a second tranche representing a 29.99% stake in PGIM Real Estate AsiaRetail Fund for S$601.5m. The price increase is negligible compared to the last acquisition (Feb19) recently.
  • Concurrently, Frasers Centrepoint Trust is acquiring an additional 1.67% stake in PGIM Real Estate AsiaRetail Fund, hence, increasing Frasers Centrepoint Trust’s total stake to 18.8%. Total effective stake held by Frasers Property increases to 54.9% from 24.3% previously.
  • The total cost for Frasers Property to acquire both tranches is S$958m. Frasers Property intends to finance both acquisitions via internal funds and/or external borrowings.
  • We also note that one of the rationales of the acquisition states “allow the Group to explore opportunities with the Company’s manager and shareholders that can potentially enhance the Company’s portfolio value and performance”.

Our View

Strategy to “double down” as one of Singapore largest retail landlords is unfolding.

  • Now with Frasers Property holding a controlling stake in PGIM Real Estate AsiaRetail Fund, we believe this further reinforces our previous view that the larger strategic intent is unfolding and we remain positive that the assets within the Fund form an attractive future pipeline (especially prized assets such as Tiong Bahru Plaza) for Frasers Centrepoint Trust to acquire and bulk up its presence in Singapore.
  • The availability of a choice collection of suburban retail properties within the PGIM Real Estate AsiaRetail Fund will, in our view, complement Frasers Property Group’s exposure in Singapore and deepen its presence within the suburban retail space in Singapore.
  • In the longer term, potential injection of the Fund’s assets into Frasers Centrepoint Trust could further propel Frasers Centrepoint Trust’s position within the retail mall sector and SREITs (see our previous report Frasers Centrepoint Trust - Time To Catch Them All).

A much-needed boost to earnings and recurring income.

  • Based on PGIM Real Estate AsiaRetail Fund’s FY18 distributable income and with the enlarged stake, we estimate that the former’s earnings would have made up c.8% to 9% of Frasers Property’s FY18 earnings.
  • In addition, PGIM Real Estate AsiaRetail Fund could also explore potential divestment of non-core assets to provide a near term earnings lift. Potential gains from divestments bode well for both Frasers Property and Frasers Centrepoint Trust.
  • The Business Times reported two days ago that PGIM Real Estate AsiaRetail Fund has entered into a put-and-call option agreement with CapitaLand (SGX:C31) and City Developments (SGX:C09) regarding the sale of Liang Court for c.S$400m. The price implies c.9% premium compared to CapitaLand Mall Trust (SGX:C38U)’s Clarke Quay mall.

Maintain BUY rating; Target Price of S$1.98.

  • We maintain our BUY rating on Frasers Property despite the recent property cooling measures implemented on the property sector as its valuation remains attractive at 0.7x P/NAV and its dividend yield remains the highest among developers at 5%, making it a safe harbour in uncertain times.
  • 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, and Thai Beverage (SGX:Y92) group of companies.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-03-21
SGX Stock Analyst Report BUY MAINTAIN BUY 1.980 SAME 1.980