FRASERS LOGISTICS & COMMERCIAL TRUST (SGX:BUOU)
Frasers Logistics & Commercial Trust - The Pipeline Others Can Only Dream Of
- Pricing in S$600m of accretive acquisitions in FY21; supported by ROFR pipeline of more than S$5.0bn.
- Healthy gearing of 37.4% and debt headroom of c.S$1.6bn conducive for further growth.
- Undemanding valuations; Frasers Logistics & Commercial Trust's DPU growth of more than 5% is higher than large-cap peers.
Frasers Logistics & Commercial Trust’s portfolio has grown more than three times in three years
- Over the last three years, Frasers Logistics & Commercial Trust (SGX:BUOU) has more than tripled its AUM.
- Frasers Logistics & Commercial Trust’s acquisitions were mainly from its Sponsor’s pipeline. In this period, Frasers Logistics & Commercial Trust’s portfolio grew at a CAGR of c.47%. Even if we do not include the S$2.2bn merger with Frasers Commercial Trust, Frasers Logistics & Commercial Trust’s portfolio still grew significantly at a CAGR of c.26%.
- In FY18, Frasers Logistics & Commercial Trust acquired a portfolio of 21 properties in Germany and the Netherlands, followed by another two in Australia for a total of c.S$1.0bn. In FY19, Frasers Logistics & Commercial Trust announced the acquisition of a portfolio of 12 properties in Germany and Australia for c.S$620m. To-date in FY20, Frasers Logistics & Commercial Trust has completed c.S$2.5bn worth of M&As (S$2.2bn pertains to the merger with Frasers Commercial Trust).
- More than S$300m in acquisitions in the last five months. Since Frasers Logistics & Commercial Trust’s successful merger with Frasers Commercial Trust, it has made three acquisitions worth more than S$300m in a span of less than five months. The acquisitions include:
- 50% stake in Farnborough Business Park, UK (S$157.7m)
- Maxis Business Park, UK (S$121.0m)
- IVE Facility, Australia (S$22.2m)
ROFR pipeline from Sponsor in excess of S$5.0bn remains
- Largest ROFR pipeline among S-REITs. Having already acquired more than S$300m of properties from its Sponsor, Frasers Logistics & Commercial Trust still has a pipeline worth more than S$5.0bn, the largest among S-REITs. The pipeline includes a good mix of assets in Australia, Europe, UK, Singapore and rest of Asia.
- Approximately 75% of the pipeline (by NLA) is logistics and industrial properties, while the rest is made up of commercial buildings and business parks.
- The breakdown of the pipeline assets includes:
- Australia – c.40 logistics/industrial and office properties valued at more than S$1.4bn.
- Europe – c.25 logistics/industrial properties valued at approximately S$900m; pipeline is mainly in Germany
- UK – 4 business parks valued at c.S$1.2bn
- Singapore – 4 office/business park properties valued at c.2.0bn
- As a large portion of the pipeline are logistics/industrial assets and majority are overseas, we expect their yields to be accretive for Frasers Logistics & Commercial Trust. For example, Frasers Logistics & Commercial Trust’s most recent acquisition of a logistics property in Australia and business park in the UK were purchased at yields of 5.9-6.3%.
Pricing in further expansion in portfolio
Portfolio expansion assumed at 10%.
- Given that Frasers Logistics & Commercial Trust’s portfolio has grown at a CAGR of c.47% over the last three years, we have priced in S$600m of acquisitions for FY21, which is in line with an average acquisition momentum of c.10% of its portfolio AUM annually. In our view, we believe that c.10% growth in portfolio is achievable especially given Frasers Logistics & Commercial Trust’s large ROFE pipeline from its Sponsor and that logistics properties will continue to remain attractive in a post COVID-19 world, supported by robust demand from e-commerce.
- We have thus assumed that the acquisitions will be funded by 40% debt and 60% equity, at a conservative yield of 5.5%. As we have assumed the acquisitions will be completed by the end of FY21, the implied DPU yield for FY22F is 4.3% based on our revised Target Price of S$1.85.
Debt headroom of c.S$1.6bn conducive for growth.
- With a healthy aggregate leverage of only c.37%, Frasers Logistics & Commercial Trust has debt headroom of c.S$1.6bn. The ample debt headroom is conducive for our assumed S$600m of acquisitions, and there could be accretion upside if Frasers Logistics & Commercial Trust utilises more debt than we have projected. Moreover, interest rates are expected to remain low in the medium-term, and Frasers Logistics & Commercial Trust would benefit from savings in finance expenses going forward.
Assumed acquisitions well within reach
- We continue to like Frasers Logistics & Commercial Trust given its robust portfolio metrics post consolidation.
- In 3QFY20, Frasers Logistics & Commercial Trust reported healthy portfolio occupancy of 97.2% with only 1.0% of leases due to expire in 4QFY20. The bulk of the vacancies are from its newly refurbished Cross Street Exchange, and we expect occupancy at the property to improve as we get past the ongoing COVID-19 pandemic.
- Our assumed acquisitions of S$600m in FY21F is well within Frasers Logistics & Commercial Trust’s reach as it continues to have a ROFR pipeline worth more than S$5.0bn from its Sponsor, offering a strong visibility of continued inorganic growth in the coming years. In addition to the c.S$1.4bn of pipeline assets in Australia, we believe that acquisitions in the near-term could come from Germany (worth c.S$750m) and the UK (worth c.S$1.2bn).
Forward yields are justified for a large-cap industrial S-REIT.
- At our revised Target Price of S$1.85, Frasers Logistics & Commercial Trust's implied target DPU yields for FY21 and FY22 are 4.1% and 4.3% respectively. In our view, the target yield is justified by Frasers Logistics & Commercial Trust’s enlarged market capitalisation post-merger with Frasers Commercial Trust.
- At a market capitalisation of c.S$4.8bn currently, we believe that Frasers Logistics & Commercial Trust should be trading at a yield that is similar to its large-cap peers such as Ascendas REIT (SGX:A17U) and Mapletree Logistics Trust (SGX:M44U) which are trading at forward yields of 3.5-4.0%. Moreover, Frasers Logistics & Commercial Trust's share price is up 15% year-to-date but has underperformed its industrial large-cap S-REIT peers who have returned an average of 21%.
Our views
- We acknowledge that Frasers Logistics & Commercial Trust’s commercial portfolio may face some near-term pressures from the ongoing COVID-19 pandemic, but the impact is mitigated from recently acquired properties and from annual rental escalations.
- We note that Frasers Logistics & Commercial Trust’s logistics and industrial properties, which make up c.60% of its portfolio, continues to enjoy very strong occupancy of 99.8%, and the average annual rental escalations of between 2-4% will help mitigate any near-term weaknesses. Moreover, Frasers Logistics & Commercial Trust’s largest commercial property, Cross Street Exchange, is still going through its first cycle of lease renewals since its refurbishment and we expect the property to record positive rental reversions in addition to an improvement in occupancy.
We maintain our BUY recommendation with a higher Target Price of S$1.85.
- We have raised our DCF-based Target Price as we assume S$600m in acquisitions in FY21 and a higher SGDAUD exchange rate of 0.97 (compared to 0.96 previously).
- See Frasers Logistics & Commercial Trust Share Price; Frasers Logistics & Commercial Trust Target Price; Frasers Logistics & Commercial Trust Analyst Reports; Frasers Logistics & Commercial Trust Dividend History; Frasers Logistics & Commercial Trust Announcements; Frasers Logistics & Commercial Trust Latest News.
- Frasers Logistics & Commercial Trust trades at an undemanding valuation for a large-cap industrial REIT with the largest ROFR pipeline from its Sponsor and the longest portfolio land tenure. There is upside risk to our forecast and Target Price if the assumed acquisitions are completed sooner-than-expected and/or acquisition yields are higher-than-projected.
Dale LAI
DBS Group Research
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Derek TAN
DBS Research
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https://www.dbsvickers.com/
2020-09-25
SGX Stock
Analyst Report
1.85
UP
1.600
