FRASERS PROPERTY LIMITED (SGX:TQ5)
Frasers Property Limited - We’ve Only Just Begun
- Propelling Frasers Property Limited to second largest in Singapore retail with the acquisition of PGIM Fund.
- Potential Singapore pipeline to bulk up Frasers Centrepoint Trust that could command higher premium to NAV.
- Strategic benefit outweighs financial benefit; gearing remains below 1x.
- Potential upside from management fees in the medium-to-long term.
Maintain BUY; raised Target Price to S$2.30 from S$1.98.
- We maintain our BUY rating on FRASERS PROPERTY LIMITED (SGX:TQ5) and raised our Target Price to S$2.30 from S$1.98, due to its limited exposure to Singapore residential property and its strong recurring income profile as a landlord in the commercial space.
- Frasers Property Limited’s valuation remains attractive at 0.7x P/NAV and its dividend yield is the highest among developers at 5%.
Where We Differ: Asset recycling in the works in the medium term.
- With the rise of its REITs share prices, we see a window of opportunity for the group to capitalise on this to grow their REITs AUM. One strategy will be to recycle mature assets (retail, hospitality, office and industrial properties) into its listed REITs to grow their AUM and at that same time, re-allocate funds towards higher return investments.
Potential catalyst:
- Asset monetisation, improved property sales, and improving free float and liquidity.
Propelling Frasers to second largest in Singapore retail with the acquisition of PGIM Fund.
- In a few surprise moves, Frasers Property Limited and Frasers Centrepoint Trust jointly acquired a controlling stake of 66.6% in PGIM Real Estate AsiaRetail Fund (PGIM Fund). We believe this is positive with the strategic benefit outweighing the financial benefit.
- With PGIM Fund’s Singapore assets, the group will become the second largest in Singapore retail, a strong contender only to a few. The potential Singapore pipeline available for Frasers Centrepoint Trust not only could bulk up Frasers Centrepoint Trust but could see Frasers Centrepoint Trust demanding for a higher premium to NAV (CapitaLand Mall Trust at 24% premium vs Frasers Centrepoint Trust at 10%).
Valuation:
- We maintain our BUY rating and raised our Target Price to S$2.30 to factor in the PGIM acquisition and higher valuation from its commercial and hospitality assets. 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. The group derives an estimated 30% of PBIT from Australia, and returns could be impacted by the weakening AUD/SGD exchange rate.
WHAT’S NEW - We’ve Only Just Begun
Frasers Property Limited and Frasers Centrepoint Trust jointly acquired a controlling stake in PGIM Fund in a few strategic moves.
- In a few surprise moves, Frasers Property Limited (SGX:TQ5) and Frasers Centrepoint Trust (SGX:J69U) jointly acquired a controlling stake of 66.6% in PGIM Real Estate AsiaRetail Fund (PGIM Fund) with a total of S$1.3bn. Frasers Property Limited and Frasers Centrepoint Trust acquired in 4 separate tranches from the shareholders of PGIM Fund, to which we believe the first transaction was made by Frasers Property Limited, which acquired an 18% stake, could have possibly triggered subsequent transactions. We refer to our previous reports on the acquisitions, see -
- The market was taken aback by Frasers Property Limited’s first acquisition as it was uncertain about its intentions with only an 18% stake. However, as the group has successfully accumulated to more than 50% holdings, this changes the perception and the group appears to have bigger plans which further reinforces our initial suspicion that there is a larger strategic intent.
- While we had previously written on the impact for Frasers Centrepoint Trust (see report: Frasers Centrepoint Trust - DBS Research 2019-03-13: Time To Catch Them All), we now explore the key reasons what could possibly drive Frasers Property Limited into taking these ‘actions’ step-by-step to gain control of PGIM Fund.
Propelling Frasers to second largest in Singapore retail.
- Given the lack of transactions and the lack of investible assets in the retail space in Singapore, we believe the Frasers Group took this opportunity to own a majority stake in the largest non-listed retail mall fund in Singapore. With PGIM Fund’s Singapore assets, the group will propel its position among the major retail mall owners to be the second largest retail mall owner by NLA in Singapore, behind Capitaland Group (CAPITALAND LIMITED (SGX:C31) / CAPITALAND MALL TRUST (SGX:C38U)). Currently, the Group stands as the third largest after NTUC (see Figure1 in attached PDF report). The group’s market share will increase from 8% to 13%.
- Although its market share is still falling short of the CapitaLand Group at 25%, the complementary asset categories in the suburban retail malls further cements the Frasers Group’s dominant presence in the north, east and south (Figure2). Based on its footprints in Singapore, we believe the group will become a strong contender only to a few retail mall owners, such as the CapitaLand Group and Far East Organisation. What the group lacks in its portfolio of retail mall assets is a well-positioned suburban mall in the west.
Potential pipeline to bulk up Frasers Centrepoint Trust that could command a higher premium to NAV, closer to CapitaLand Mall Trust’s 24% premium to NAV.
- A review of Frasers Property Limited’s assets shows that there are limited assets to be injected into Frasers Centrepoint Trust aside from its remaining crown jewels, Waterway Point and Northpoint City South Wing. We believe Waterway Point is ready to be injected and expect this could happen in the near future while Northpoint City could also be ready in the next 1-2 years.
- Now with the portfolio of assets from PGIM Fund, it gives Frasers Centrepoint Trust a longer runway to remain as a Singapore-centric retail REIT which could command a premium closer to CapitaLand Mall Trust’s. CapitaLand Mall Trust’s P/NAV historical average trades at 24% premium to its NAV vs Frasers Centrepoint Trust’S P/NAV historical average at only 10% premium to its NAV. This could bring Frasers Centrepoint Trust to a new range of trading band.
- While Frasers Centrepoint Trust could potentially get a first-hand pick from the portfolio of assets, this would not prevent Frasers Property Limited /PGIM Fund to divest to a third party should the offer price be too attractive to refuse. Potential gains from divestment bodes well for both Frasers Property Limited / Frasers Centrepoint Trust.
- Business Times previously reported that PGIM Real Estate has entered into a put-and-call option agreement with CapitaLand 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’s Clarke Quay mall.
- While Frasers Property Limited / Frasers Centrepoint Trust owns a majority stake in PGIM Fund which could grant them access on the fund’s assets, we cautioned that without a full control may still pose some risks in gaining access to the assets. The ability to accumulate a larger stake (possibly up to 100%) in the fund will be positive for the group.
Limited financial impact; strategic benefits as a group bears more weight.
- Based on the limited information on the fund, we estimate that Frasers Property Limited’s current effective stake of 55% would contribute only 7 Scts per share to its RNAV, approximately 2% of its RNAV. Based on PGIM Fund’s FY18 distributable income, we estimate that it will contribute c.3% to Frasers Property Limited’s FY18 core earnings.
- While the investment may have limited immediate financial contributions, we believe the strategic benefits as mentioned above could bear more weight for Frasers Property Limited and the group as a whole.
Gearing remains below 1x despite scaling up to 100%.
- The announcement states that Frasers Property Limited intends to finance the acquisitions via internal funds and external borrowings or a combination thereof. We estimate that Frasers Property Limited’s gearing (including REITs’ debt) will remain below 1x, between the range of 0.9x to 1.0x despite factoring in potential scaling up its stake to 100%. Our estimates are based on acquisition either using all cash or a partially debt funded by Frasers Property Limited while we assume Frasers Centrepoint Trust’s acquisition of its 19% stake is 40% debt-funded and 60% equity-funded.
- Management considers gearing levels between 0.8x and 1x as a comfortable level to optimise its capital structure for its investments as a developer / landlord. Nevertheless, we believe there are opportunities for Frasers Property Limited to recycle its mature assets into its portfolio of REITs which could reduce its gearing levels and provide more room for further accretive investments.
- One such asset which we believe is ‘ripe’ for recycling is Waterway Point. The potential divestment of Waterway Point could not only reduce its gearing levels to marginally below 0.9x, it could further augment Frasers Centrepoint Trust’s position as the largest suburban mall in Singapore.
Potential upside from management fees but dependent its ability to vote for a change in asset manager.
- While the possibility of the Frasers Group managing PGIM’s portfolio of assets may or may not happen, we believe this could be a potential upside should the Frasers Group becomes a more ‘active’ shareholder given its controlling stake.
- Given the group’s expertise and experience in managing a full spectrum of assets, we believe it has the capabilities to be the asset manager. However, this is dependent on whether the group is able to vote for a change in asset manager with its current 66.7% controlling stake based on the fund guidelines / trust deeds which we are not privy to. If successful and based on PGIM’s current AUM, we estimate that management fees could be between S$17m and S$34m. Albeit small, this further adds to its asset-light strategy and drive recurring income.
Maintain BUY rating; raised Target Price to S$2.30 from S$1.98.
- We maintain our BUY rating and raised our Target Price to S$2.30 from S$1.98 previously. We raised our Target Price to factor in the potential contribution of the PGIM acquisition by both Frasers Property Limited and Frasers Centrepoint Trust (by pegging to our target price for Frasers Centrepoint Trust) and updating the valuations of its commercial and hospitality portfolio to reflect market cap rates and rents.
- We have yet to factor in the higher valuation from the rumoured price by interested buyers of Frasers Tower in a recent news report. Based on the rumoured price, we estimate this could add another 14 Scts to our RNAV (4% of our revised RNAV). See report: Frasers Tower - DBS Research 2019-04-08: Whose Hands Will It Land On?
- We remain positive on Frasers Property Limited due to its limited exposure to Singapore residential property amidst a subdued sentiment led by new property measures, and its strong recurring income profile as a landlord in the commercial space which was further enhanced by the recent acquisition of PGIM, news on interested parties to acquire its newly completed Frasers Tower and the latest draft URA Masterplan 2019 that has emphasized on the redevelopment of CBD and potential higher plot ratio.
- Frasers Property Limited’s 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:
- potential asset monetisation from ongoing strategies to crystallise value across its portfolio including Northpoint, Waterway Point and Frasers Tower,
- improved property sales across its major markets,
- positive changes in government policies, and
- improved free float and liquidity in the market with the potential restructuring of TCC Group, and THAI BEVERAGE PUBLIC CO LTD (SGX:Y92) group of companies.
Rachel TAN
DBS Group Research
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Derek TAN
DBS Research
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https://www.dbsvickers.com/
2019-04-10
SGX Stock
Analyst Report
2.30
UP
1.980
