Frasers Logistics & Commercial Trust - DBS Research 2020-08-05: Trading Up In Quality


Frasers Logistics & Commercial Trust - Trading Up In Quality

  • Accretive acquisition of two 100%-occupied freehold properties from its Sponsor.
  • Recognised a gain of c.S$7.7m from the divestment of a logistics property in Australia.
  • Unlocked value in the portfolio by trading a low-yielding asset for two properties with higher yields.

Maintain BUY on Frasers Logistics & Commercial Trust and raised Target Price to S$1.60.

  • We maintain our BUY call and raised our Target Price to S$1.60 for Frasers Logistics & Commercial Trust (SGX:BUOU).
  • Frasers Logistics & Commercial Trust has just announced the accretive acquisitions of two freehold properties in Australia and the UK, coupled with the divestment of the remaining 50% stake in a logistics property in Australia. Frasers Logistics & Commercial Trust will recognise a S$7.7m gain on the divestment and a net accretion of more than 0.5% on the two acquisitions to be funded by debt.
  • Our higher Target Price is driven by
    1. net accretion from the sales and purchase of the three properties, and
    2. lower discount rates mainly from lower risk-free and interest rates.

Operating highlights: Accretive acquisitions and unlocking of value from the divestment

  • Frasers Logistics & Commercial Trust's 3Q20 revenue of S$103.7m is a 71% increase q-o-q due mainly to the merger with Frasers Commercial Trust on 15 April 2020.
  • Distributable income of S$61.1m for 3Q20; YTD distributable income will make up c.72% of our FY20F projections.
    • In line with our FY20F projections (based on two quarters or earnings from enlarged portfolio).
  • Announced the acquisition of two accretive assets from its Sponsor and the divestment of one lower-yielding property.
    • Acquiring IVE Facility in Melbourne, Australia.
      • Freehold logistics property for S$22.2m.
      • 100% occupied with a WALE of 4.9 years.
      • Estimated yield of 5.85%.
    • Acquiring Maxis Business Park in Thames Valley, UK.
      • Freehold business park asset for S$67.7m (a further S$53.3m in shareholders’ loan).
      • 100% occupied with a WALE of 6.7 years.
      • Estimated yield of 6.20%.
  • Unlocking value with the divestment of the remaining 50% stake in 99 Sandstone Place, Queensland, Australia
    • Sale consideration of S$150.5m (50% stake).
    • 12.2% premium to book value, and 13.6% higher than initial sale of 50% stake (July 2019).
    • Net gain of S$7.9m over the book value.
    • Estimated yield of 5.00%.
  • Transactions estimated to be net accretive (c.0.5%); additional S$1.4m in revenues per annum.
  • Acquisitions will be funded by existing resources and debt facilities.

Robust capital management metrics; debt headroom of S$1.6bn

  • Marginal weakening of capital management metrics in 3Q20 mainly due to consolidation with Frasers Commercial Trust.
    • Consolidated total debt of S$2.3bn.
    • Aggregate leverage of 37.4%.
    • Strong interest coverage ratio of 6.7x.
    • Low all-in borrowing cost of 2.1%.
  • In advanced negotiations to refinance the remaining S$166m of loans maturing in 4Q20.
    • Average weighted debt maturity of 3.2 years.

Healthy portfolio metrics post consolidation

  • Portfolio occupancy fell to 97.2% in 3Q20 mainly due to consolidation with Frasers Commercial Trust’s portfolio.
    • Logistics and industrial portfolio occupancy inched down 0.2ppt to 99.8% in 3Q20. Only one vacancy at a property in South Australia that should be back-filled quickly
    • Commercial portfolio occupancy declined 1.4ppts q-o-q to 93.6% in 3Q20, mainly due to lower occupancies at Cross Street Exchange and Alexandra Technopark.
  • Long portfolio WALE of 5.2 years.
  • Negative rental reversion of c.3.2% for the enlarged portfolio, mainly due to negative rental reversions of 3.9% for the logistics and industrial portfolio.
    • Mix of long-term and short-term lease renewals in Australia and Germany. Built-in rental escalations at some of its leases that range from 3.0-3.5%; negative rental reversions will be reversed within 1-2 years.
    • Commercial portfolio registered a 10.6% positive rental reversion, led by renewals in Singapore and the UK. Only Australia reported a negative rental reversion
  • Slightly more than half of the 128,000 sqm of renewals in 3Q20 are on short-term leases of 1.0-1.5 years.
    • Short-term leases are to assist tenants who are not ready to make long-term commitments amid the uncertain economic landscape.
    • Frasers Logistics & Commercial Trust is confident of retaining these tenants once there is more clarity on their business operations.
  • Only 1.0% of portfolio leases remain to be renewed in FY20 and 8.1% will be expiring in FY21.
    • Entire 1.0% of expiries remaining in FY20 are from commercial property leases.
    • Expect most of expiring leases in FY21 to be renewed.
    • Most of the logistics and industrial renewals should see positive rental reversions due to limited new supply except in West Melbourne.

Our views: Consolidation starting to pay off

  • We continue to like Frasers Logistics & Commercial Trust post-merger with Frasers Commercial Trust, and the benefits of its diversification are becoming apparent. Despite the slight weakening of selected portfolio and capital management metrics inherited from Frasers Commercial Trust, the enlarged Frasers Logistics & Commercial Trust is now much stronger to tackle the challenging business climate amid the COVID-19 pandemic. An example is the positive rental reversion for the commercial portfolio that helped offset some of the negative reversions for the logistics and industrial portfolio; albeit a very small impact due to the renewal of smaller commercial leases.
  • The ongoing COVID-19 pandemic is starting to put pressure on Frasers Logistics & Commercial Trust’s portfolio as evident in the negative rental reversions in logistics leases in Australia and the decline in occupancy rates in commercial properties in Singapore. However, we believe that the in-built rental escalations for a majority of Frasers Logistics & Commercial Trust’s leases will be more than sufficient to offset the downward pressure to earnings in FY20.
  • Despite the challenging economic environment, Frasers Logistics & Commercial Trust has once again proven its ability to trade its lower-yielding assets for higher-yielding ones. With an enlarged ROFR pipeline of more than SS$5.0bn, we are confident that Frasers Logistics & Commercial Trust will be able to continue with accretive acquisitions especially from its Sponsor. Moreover, the two newly announced acquisitions are expected to be completed in September 2020 and the additional income will provide an upside to earnings in FY21.

We maintain our BUY recommendation with a higher Target Price of S$1.60.

Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-08-05
SGX Stock Analyst Report BUY MAINTAIN BUY 1.60 UP 1.400