Frasers Property Limited - DBS Research 2020-05-14: Together As A Group


Frasers Property Limited - Together As A Group

  • Frasers Property's 1HFY20 net profit fell 12% y-o-y due to lower settlement of properties in Australia, weak hospitality segment and higher interest expense.
  • CIVID-19 led to lower property sales in China and Singapore, while hospitality segment took a bigger hit.
  • Gearing increased to > 1x; to temporarily suspend interim dividend for prudence.
  • Maintain BUY; lower Target Price to S$1.70.

Together as a group

1HFY20 results supported by development profits from China, contributions from PGIM ARF.

  • Frasers Property (SGX:TQ5)'s 1HFY20 net profit fell 12% y-o-y to S$234m, above street’s but in line with our full-year estimates. Net profit (before fair value change and exceptional items) fell 9.2% y-o-y to S$218m.
  • Revenue and profit before interest, fair value change, taxation and exceptional items (PBIT) grew 6% y-o-y and 19% y-o-y respectively, supported by settlement of development projects in China, maiden contributions from PGIM Real Estate Asia Retail Fund (PGIM ARF) and consolidation of step-up acquisition of Golden Land (Thailand & Vietnam PBIT +60% y-o-y). But net profit was impacted by lower development profits from Australia (PBIT -87% y-o-y) and Singapore (PBIT - 3% y-o-y), weak hospitality segment due to COVID-19 (PBIT - 25%?) and higher interest expense (+27%).
  • Frasers Property's 1HFY20 revenue grew 6% y-o-y mainly due to contributions from settlement of development projects in China (+171% y-o-y), maiden contributions from PGIM ARF (Singapore revenue +8%) and the consolidation of Golden Land (Thailand & Vietnam revenue increased to S$407m from S$52m in 1H19). PBIT grew 19% y-o-y led by both development profits (+15% y-o-y) and recurring income (+19% y-o-y). Recurring income PBIT rose 19% y-o-y mainly led by contributions from the newly acquired PGIM ARF and higher contributions from Frasers Property Industrial (FPI; PBIT +18%) from the recognition of development profits from a built-to-suit project and sale of land lots.
  • Frasers Property's 2QFY20 results: Despite a 12% increase in PBIT, 2QFY20 net profit fell 38% y-o-y to S$75m due to higher interest expense (+24%) and lower fair value change (-S$1m vs S$22m in 2Q19). Net profit (before fair value change and exceptional items) fell 24% y-o-y to S$76m.
  • 2QFY20 EBIT margins fell to 32.1% vs 35.9% in 1QFY20 possibly led by segments that were impacted by COVID-19. 1HFY20 EBIT margins was 34.2% vs 26.5% in FY19.

Gearing > 1x; to temporarily suspend interim dividend for prudence.

  • Frasers Property's gearing increased further to 106.8% in 2QFY20 vs 92.2% in 1QFY20 and 85.9% in 4QFY19 mainly due to redemption of its S$700m perpetual securities in Mar 2020 and acquisition of Lakeshore Business Park Heathrow. ICR was stable at 4x.
  • Frasers Property has secured / finalising the refinancing of debts due in FY20 and does not foresee any issues. Average cost of debt was marginally lower at 2.6% vs 2.7% in 1Q20 and 2.9% in 4Q19.
  • The board has taken the precautionary decision to temporarily suspend interim dividends for cash conservation.

1HFY20 sales volume fell 30% y-o-y to 614 units vs 876 units in 1H19; unrecognised revenue stable q-o-q at S$1.3bn.

  • Singapore (-44% y-o-y) and China (-94% y-o-y) recorded lower sales volume impacted by lockdown and circuit breaker measure while sales in Australia grew 20% y-o-y.
  • Unrecognised development revenue remained stable at S$1.3bn, mainly from Australia.

Seaside Residences on schedule to complete in 2HFY20; Australia expects to settle 1.6k units in 2HFY20.

  • Projects expected to be completed in FY2020 include
    • Seaside Residences – 2H2020 (93% sold),
    • in Australia, Frasers Property expects to settle 1.6k units in 2HFY20,
    • Nine Riverside Quarter, UK (54% sold out of 172 units),
    • Gemdale Megacity (Phase 5H) (100% sold).
  • Despite the implementation of the circuit breaker, Seaside Residences is on schedule to complete in 2HFY20.

In 1HFY20, only 20% of target were released for sale.

  • In Australia, Frasers Property had a target to launch 2k units in early FY20 (vs 980 units launched in FY19). As at 1H20, only 399 units (20% of target) were released, likely launches were delayed due to COVID-19. However, more units could be released in 2HFY20 as restrictions start to ease in Australia.

COVID-19 impact / outlook.

  • Retail tenants support package was up to S$45m in Apr and extended to May with additional top-up of half-month rental rebate and half-month property tax rebate. Estimated property tax rebate is c.S$45m. For tenants in non-Singapore properties, Frasers Property will be offering some rent relief to tenants that have been significantly impacted by COVID-19, however, the amount is not significant, according to management.
  • Australia residential property sales have been impacted by COVID-19 pandemic which saw cancellations in the month of Apr 20 of 25-30%. However, management has seen some improvement at the end of Apr and expects possibly less cancellations ahead as lockdowns and movement restrictions start to ease.
  • Given the high gearing ratio, management intends to lower its gearing ratio with asset recycling into its REITs as one of its strategy. However, timing remains uncertain given the unfavourable market conditions.

Cash position improved.

  • 1HFY20 operating activities saw net cash outflow following lower collections and higher payments for payables and contract liabilities. Frasers Property saw a net outflow from investment activities of S$0.2m following its recent acquisitions and net inflow from financing activities from higher borrowings, partially to redeem the perpetual securities.

Financial metrics relatively stable.

  • Net debt-to-equity inched up further to 106.8% vs 92.2% in 1QFY20 vs 85.9% in 4QFY19. After adjusting for perpetuals as Debt (Debt+Perpetual securities)/Equity, the ratio inched up to 2.4x vs 2.3x in 1Q20 and 2.1x in 4QFY19. The percentage of fixed rate debt has dropped marginally to 68% vs 70% in 1QFY20 / FY19.
  • Cost of debt fell marginally to 2.6% vs 2.7% in 1QFY20 and 2.9% in FY19. On a debt-asset perspective (Debt+Perpetuals/Asset), the ratio fell to 0.45x vs 0.52x as at FY19.

Maintain BUY rating; Target Price lowered to S$1.70.

  • We maintain our BUY rating on Frasers Property but lowered our Target Price to S$1.70 from S$2.05. Our lower Target Price of S$1.70 is based on a higher discount of 50% to RNAV from 40% previously to factor the higher gearing, lower dividend and potential headwinds caused by COVID-19.
  • While Frasers Property Share Price may face near-term weakness given the weak results, lower dividend and higher gearing, we remain positive on Frasers Property’s ability to extract value from its recent investment in PGIM ARF and asset monetisation that could lower its gearing when the opportunity arises. Also, the latest draft URA Masterplan 2019 with an emphasis on the redevelopment of the CBD would continue to support high occupancy rates at Frasers Property’s commercial properties in the CBD.
  • See Frasers Property Share Price; Frasers Property Target Price; Frasers Property Analyst Reports; Frasers Property Dividend History; Frasers Property Announcements; Frasers Property Latest News.
  • Frasers Property’s valuation remains attractive at 0.5x P/NAV compared to its peers even though its dividend yield has fallen to 3%.
  • Key catalysts include:
    1. potential asset monetisation from ongoing strategies to crystallise value across its portfolio including Northpoint, PGIM ARF and industrial assets,
    2. improved property sales across its major markets, and
    3. positive changes in government policies.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-05-14
SGX Stock Analyst Report BUY MAINTAIN BUY 1.70 DOWN 2.300