Frasers Logistics & Commercial Trust - UOB Kay Hian 2021-08-17: Growth From Focus On Logistics Augmented By Development Projects

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FRASERS LOGISTICS & COMMERCIAL TRUST (SGX:BUOU)

Frasers Logistics & Commercial Trust - Growth From Focus On Logistics Augmented By Development Projects

• Frasers Logistics & Commercial Trust (SGX:BUOU) benefits from the appreciation in capital values for its logistics properties in Australia and Europe due to cap rate compressions in excess of 50bp. It will develop four units of logistics warehouses at Blythe Valley Park and will review its plan for a last-mile fulfilment centre at Farnborough Business Park.
• We expect Frasers Logistics & Commercial Trust to pivot toward the New Economy by expanding in logistics and business park properties. Distribution yield is attractive at 5.1% for FY22. Maintain BUY. Target price: S$1.79.

WHAT’S NEW

• Structural changes drive demand for logistics space. According to CBRE, penetration of online retail sales for Australia jumped 3.3ppt to 12.6% in 2020. It is currently hovering at 13.3% and is continuing on an upward trajectory. The acceleration in penetration of online retail sales is structural and did not reverse post-lockdown. Australia’s e-commerce penetration is low relative to other developed countries, such as the UK (19%) and the US (14%), but has been catching up. The entry of e-commerce giant Amazon in 2017 contributed significantly to online retail sales in Australia and drives the increased adoption of e-commerce. Amazon provides low prices, vast selection and fast delivery and is supported by 11 fulfilment centres across all major cities.
• Potential for appreciation of capital values. There is an abundance of liquidity competing to acquire tenanted logistics properties at prime locations. Frasers Logistics & Commercial Trust logistics portfolio is currently valued at cap rates at 5.5-6.0% for Australia as of Sep 20. According to CBRE, yields were compressed by 46bp, 57bp and 50bp y-o-y respectively to 4.25% in Sydney, 4.43% in Melbourne and 5.00% in Brisbane. Frasers Logistics & Commercial Trust’s logistics portfolio is valued at cap rates at about 5% for Europe. Recently, prime yields have hit a record low of 3.35% for Germany and 3.00% for the Netherlands. Thus, there is a significant upside for valuation of Frasers Logistics & Commercial Trust’s logistics properties in Australia and Europe when revalued at end-FY21.
• Value creation through development. Newly acquired Blythe Valley Park located near Birmingham and within UK’s Golden Triangle has a 3-hectare vacant land, which could be developed for additional logistics space. Frasers Logistics & Commercial Trust plans to develop the site into four units of logistics warehouses. Management has conducted evaluation and expect the development to be viable. More details would be shared when the plan is finalised.
• Similarly, Farnborough Business Park located in Thames Valley has an office development site (Plot C, Pinehurst III & IV) with planning permission for a commercial building with 18,000sqm of office space. Management is reviewing feasibility to redevelop the site into a last-mile e-commerce fulfilment centre instead given its proximity to Farnborough Airport and a high-density residential catchment.
• Focused on expansion in logistics and business park properties. Logistics properties are Frasers Logistics & Commercial Trust’s preferred asset class due to its strong tenant relationship and sizeable sponsor pipeline of logistics properties in Australia, Germany and the Netherlands. In the near term, management sees opportunities to create value of its CBD Commercial properties through active asset management to optimise rents and occupancy but is unlikely to hold on to them over the longer term. Frasers Logistics & Commercial Trust is likely to rebalance its asset class mix towards logistics and business park properties over the next 3-5 years.

STOCK IMPACT

• Riding on e-commerce growth and sizeable sponsor pipeline in e-commerce creates demand for more logistics space. Online COVID-19 pandemic have caused disruptions and exposed the vulnerabilities of lean just-in-time supply chains. It is estimated that the transition from just-in-time to just-in-case supply chains would increase inventories by 5-10%.

EARNINGS REVISION/RISK

• We maintain our existing DPU forecast.

VALUATION/RECOMMENDATION

• Buying yield and growth from logistics. Frasers Logistics & Commercial Trust provides a distribution yield of 5.1% for FY22, much more attractive than Mapletree Logistics Trust (SGX:M44U)’s target price of S$1.79 is based on DDM (cost of equity: 6.25%, terminal growth: 2.00%).
• See
  • Frasers Logistics & Commercial Trust's Share Price,
  • Frasers Logistics & Commercial Trust's Target Price,
  • Frasers Logistics & Commercial Trust's Analyst Reports,
  • Frasers Logistics & Commercial Trust's Dividend History,
  • Frasers Logistics & Commercial Trust's Announcements,
  • Frasers Logistics & Commercial Trust's Latest News.

SHARE PRICE CATALYST

• Continued growth and expansion by tapping into sponsor pipeline.
• Compression of cap rates for logistics properties leading to sizeable revaluation gains.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-08-17

SGX Stock Analyst Report BUY MAINTAIN BUY 1.790 SAME 1.790