FRASERS COMMERCIAL TRUST (SGX:ND8U)
FRASERS LOGISTICS & IND TRUST (SGX:BUOU)
Frasers Commercial Trust - Proposed Merger With Frasers Logistics & Industrial Trust ~ Accept Offer
- TAKE PROFIT from Neutral, with SGD1.68 Target Price from SGD1.65, 1% downside. Frasers Commercial Trust and Frasers Logistics & Industrial Trust’s proposed merger offer is fair in our view and favourable to unitholders, as the enlarged REIT will benefit from an increased size and scale, greater diversification in terms of asset class and geography and it offers a better inorganic growth potential.
- The scheme consideration values Frasers Commercial Trust at SGD1.68 per unit ie 1.05x P/BV which is at a premium to historical trading prices and also higher than our previous fair value estimate of SGD1.65.
Merger details.
- FRASERS LOGISTICS & INDUSTRIAL TRUST (SGX:BUOU) and FRASERS COMMERCIAL TRUST (SGX:ND8U) announced the proposed merger by way of a trust scheme in which each of Frasers Commercial Trust’s unitholders will receive 1.233 new Frasers Logistics & Industrial Trust units (91% of total) and SGD0.151 in cash (9%), implying a gross exchange ratio of 1.355x.
- The enlarged REIT will have a portfolio value of SGD5.7bn and will be among Singapore’s top 10 REITs by market capitalization (vs ranked 24th as it is currently). This should help in gaining a better investor traction and move up in index inclusion weightage. See Frasers Commercial Trust Announcements & Frasers Logistics & Industrial Trust Announcements.
- The proposed merger is subject to unitholders’ approval and court sanctions and it is expected to be completed by Mar/Apr 2020.
Deal strongly benefits Frasers Commercial Trust unitholders.
- The proposed merger is accretive to Frasers Commercial Trust’s pro-forma FY19 DPU +2.5% and it offers scalability and size which, in our view, was one of the constraining factors for Frasers Commercial Trust’s growth in the past. The increased free float and index inclusions should also help narrow its trading discount (100-150bps) compared to its larger peers.
- Borrowing cost is also expected to see a reduction, on the back of a larger size.
- The combined REIT also provides greater diversification benefits in terms of asset class (logistics, CBD commercial and office and Business Parks), geographical market and it greatly reduces Frasers Commercial Trust’s tenant concentration risks (contributions to total rent income from its top 10 tenants will decrease from 52% to 24%).
- The enlarged REIT will also have a better inorganic growth potential with a sponsor Rights Of First Refusal (ROFR) pipeline in excess of SGD5.0bn across asset class and markets. Weighted Average Lease Expiry (WALE) will lengthen from the current 4.9 years to 5.8 years, turning the REIT more defensive.
Proposed acquisition of a 50% stake in FBP.
- Subject to above merger approvals, the enlarged REIT will also acquire a 50% stake in Farnborough Business Park (FBP) from sponsor, for GBP90.5m (c.SGD158.4m), a 1% discount to its latest valuation. Frasers Commercial Trust currently holds the remaining 50% stake in the asset.
- NPI yield of proposed acquisition is 6% and the acquisition will be fully funded by debt. Upon completion of the merger and proposed transaction, the enlarged REIT gearing will stand at 37%, offering a debt headroom of SGD 868m (assuming 45% gearing levels).
Vijay Natarajan
RHB Securities Research
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https://www.rhbinvest.com.sg/
2019-12-03
SGX Stock
Analyst Report
1.68
UP
1.650
99998
SAME
99998
