Frasers Property Limited - DBS Research 2019-05-06: Asset Recycling To Drive Growth


Frasers Property Limited - Asset Recycling To Drive Growth

  • FRASERS PROPERTY LIMITED (SGX:TQ5)'s 1H19 core PBIT rose 25% y-o-y, supported by settlements of residential units in Australia and China, and higher recurring profits (+9% y-o-y).
  • Sales volume fell 28% y-o-y from all markets except China.
  • Jiak Kim site set to be launched soon.
  • Maintain BUY; Target Price S$2.30.

Maintain BUY; Target Price of S$2.30.

  • We maintain our BUY rating on FRASERS PROPERTY LIMITED (SGX:TQ5) and Target Price of S$2.30, due to its limited exposure to Singapore residential property and its strong recurring income profile.
  • Frasers Property’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.

Potential catalyst:

  • Asset monetisation, improved property sales, and improving free float and liquidity.

Frasers Property's 1H19 strong core PBIT resulting from settlement of residential properties and higher recurring profits.

  • Frasers Property's 1H19 net profit grew 37% y-o-y to S$266m. The net profit growth was largely led by higher development profits mainly from the settlement of properties in China and Australia, and recurring income growth of 9% y-o-y.
  • Core PBIT increased 25% y-o-y. Sales volume dropped 28% y-o-y with lower sales from all markets except China.

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 - Asset recycling to drive growth

Strong results led by development properties from Australia and China, contributions from Frasers Tower, south wing of Northpoint City and UK business parks.

  • Frasers Property's 1H19 net profit grew 37% y-o-y to S$266m, forming 53% of the street’s full-year estimate. Net profit growth was largely led by higher development profits mainly from the settlement of properties in China and Australia. Recurring income grew 9% y-o-y, mainly led by contributions from Frasers Tower and the south wing of Northpoint City, which commenced operations in May 2018 and December 2017 respectively, and full 1H contributions from its UK business parks acquired in FY18.
  • Frasers Property's 1H19 revenue grew 27% y-o-y mainly due to settlement of development projects in Australia and China, and a full quarter’s contributions from the UK business parks. Profit before interest, fair value change, taxation and exceptional items (PBIT) grew 25% y-o-y, led by higher contributions from development properties (+48%) in all markets except Singapore.
  • Frasers Property's 2Q19 net profit rose 8% y-o-y to S$120m. Excluding fair value changes and EI, net profit would have fallen 11% y-o-y to S$100m from lower development profits from Singapore and weaker contributions from the hospitality segment (core profit -12% y-o-y).
  • EBIT margins improved to 28% vs 27% in 1Q18 and 24% in FY18, possibly led by development properties.
  • Frasers Property has proposed an interim dividend of 2.4 Scts per share, which is flat y-o-y.

1H19 sales volume fell 28% y-o-y to 876 units from all markets except China; unrecognised revenues improved to S$1.8bn (vs S$1.6bn in 1Q19).

  • All markets recorded lower sales volumes except China (+47% y-o-y) following the launch of Phase 5H of Gemdale Megacity in March 2019, of which 57% were sold within a week of launch. Sales in Singapore slowed to only 43 units in 1H19 as the only project with inventory for sale, Seaside Residences, had already achieved 87% take-up. Sales in Australia fell 17% y-o-y as sales slowed mainly in 2Q19.
  • Frasers Property's 1Q19 sales in Thailand fell 6% y-o-y while Vietnam continued to record strong sales which increased 62% y-o-y in 1H19, mostly from the Q2 Thao Dien project launch. These numbers have yet to be included in the sales volume figures above.
  • Unrecognised development revenue increased marginally following the new launch in China, at S$1.8bn as at 2Q19 from S$1.6bn in 1Q19.

Two ongoing projects in China, and ongoing industrial and retail projects in Australia will be completed in FY19.

  • Major projects that will be completed in FY19 include residential projects in Australia which are mostly more than 95% sold except two projects with 17% and 83% take-ups, and in China, Gemdale Megacity (Phase 4D) (99.6% sold) and Baitang One (Phase 3C2) (97.1% sold). The newly launched Gemdale Megacity (Phase 5H) is expected to be completed in 4Q20.
  • On commercial assets in Australia, Frasers Property is currently developing 12 new assets with a total of 216,100 sqm expected to be completed in 2H19/FY2020. Six of these assets (mainly industrial properties) are expected to be retained in the balance sheet.

Riviere (Jiak Kim site) expected to be launched soon; lowered FY19 target launches in Australia.

  • Frasers Property’s only land bank in Singapore, the 455-unit Riviere (Jiak Kim land site) is expected to be launched soon (previously targeted for launch in 1HCY19). The development will also include Fraser Residence Promenade, comprising 80 serviced apartments fully integrated with the conserved warehouse.
  • In Australia, Frasers Property released 498 units for sale in 1H19 and lowered its FY19 sales target from 2,300 units to 1,590 units. It has settled 1,165 units, 51% of its FY19 target (c.2,300 units). As residential prices in the key cities in Australia have fallen c.10-15%, management believes that the decreasing trend would moderate to mid-single-digit levels in the next 1- 2 years.
  • While management remains cautious especially in residential properties given the tightening of credit, management believes that there are still pockets of segments that are seeing encouraging demand. Settlement risks on existing projects remain manageable.

Potential synergies and efficiencies from strategic stake in PGIM Fund; potential asset monetisation to crystallise value.

  • With the acquisition of a strategic stake in PGIM Fund, management believes that there are potential synergies and efficiencies that the company could derive from operation collaborations in management the assets within the fund.
  • Frasers Property’s managed REITs are actively looking to grow their AUMs and are trading at yields that are conducive for potential asset monetisation opportunities at an appropriate time.

Cash position improved.

  • Net cash inflow improved following collections from the settlement of development properties. The group saw minimal net outflow from investment activities and marginal net inflow from financing activities.

Financial metrics relatively stable.

  • Net debt-to-equity remained relatively stable at 84%, after adjusting for perpetuals as Debt (Debt+Perpetual securities)/Equity remained flat at 2.0x. The percentage of fixed rate debt dropped marginally to 75% (vs 78% in FY18). Cost of debt remained stable at 3%.
  • On a debt-asset perspective, it remains relatively stable at 0.53x (on an adjusted Debt+Perpetuals/Asset perspective).

Maintain BUY rating; Target Price of S$2.30

  • We maintain our BUY rating on Frasers Property and Target Price of S$2.30.
  • We remain positive on Frasers Property due to its limited exposure to Singapore residential properties amidst subdued sentiments led by new property measures, and its strong recurring income profile as a landlord in the commercial space. This 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 emphasises on the redevelopment of CBD and potentially higher plot ratio.
  • Frasers Property’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
    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 | 2019-05-06
SGX Stock Analyst Report BUY MAINTAIN BUY 2.300 SAME 2.300