Frasers Logistics & Commercial Trust - UOB Kay Hian 2022-09-08: Logistics Portfolio Resilient But German Economy Could Be Achilles’ Heel

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FRASERS LOGISTICS & COMMERCIAL TRUST (SGX:BUOU)

Frasers Logistics & Commercial Trust - Logistics Portfolio Resilient But German Economy Could Be Achilles’ Heel

• Germany imports 55% of its natural gas from Russia and its economy is besieged by surging energy prices that have increased 10x compared with pre-COVID-19 levels. Fortunately, Frasers Logistics & Commercial Trust’s Germany portfolio has a long WALE of 6.3 years and annual rental escalation is CPI-linked. Germany accounted for 22.9% of Frasers Logistics & Commercial Trust’s portfolio valuation as of Jun 22.
• Frasers Logistics & Commercial Trust's distribution yield is attractive at 5.8% for FY23. Maintain BUY but lowered target price to S$1.60.

German economy in limbo.

• The German economy is slowing down due to supply chain disruptions, surging energy prices and the slowdown of its second largest export market — China. The auto manufacturing industry suffered the hardest hit. Germany is on the brink of slipping into a recession. Germany imports 55% of its natural gas from Russia through the North Stream pipeline. Energy prices have increased by 10x since the Russia-Ukraine war started and are 50% higher compared with neighbouring France. The Bundeskbank warned that an immediate ban on Russian gas imports would reduce GDP growth by 5ppt, dragging Germany into a deep recession.
• Prolonged stress from high energy prices and supply chain disruptions. German foreign minister Annalena Baerbock cautioned that the Russia-Ukraine war could drag on for years. Heat wave and dry spells have lowered water levels on the Rhine, which hinders the movement of barges to transport raw materials and finished goods in Germany’s most heavily industrialised areas, causing more supply chain disruptions.
• Resiliency from limited supply. The structural limited supply of logistics space and rising costs of land and building materials have fed into steep increase in asking rents. Prime rents have increased 7% to €96/sqm/year in 1H22. Financing costs have increased as reflected in the increase in yield for 10-year bunds, which reversed from -0.18% to 1.60% in 8M22. According to CBRE Group (CBRE), yields for prime logistics properties were pressured by higher interest rates and expanded 15bp to 3.15% in 1H22.
• Frasers Logistics & Commercial Trust's Germany portfolio has a long WALE of 6.3 years. It benefits from higher inflation as annual rental escalation is CPI-linked. Rental reversion was +3.3% in 1HFY22 (average vs average). Occupancy was maintained at 100%.

Australia: Favourable demand-supply dynamics.

• E-commerce penetration inched slightly higher by 0.3ppt h-o-h to 14.6% in 1H22. Vacancy rate declined 0.5ppt y-o-y to reach a record and global low of 0.8% in 1H22 (Brisbane: 2.3%, Melbourne: 1.1% and Sydney: 0.2%). The pipeline of new supply for 2022 is 53% pre-committed due to pent-up demand. Supply of logistics space is expected to fall in 2023 and beyond.
• Logistics rents maintain an uptrend. According to CBRE, super prime rose 13.1% on a nationwide basis in 2Q22 (Sydney: +22.8% y-o-y, Melbourne: +13.9% y-o-y and Brisbane: ncentives fell 2ppt. CBRE expects super prime rents to grow at a CAGR of 5.0% during 2022-26.
• Frasers Logistics & Commercial Trust's Australia portfolio has a long WALE of 4.2 years. It benefits from annual rental escalation averaging 3.1%. Rental reversion was +6-7% in 3QFY22 (average vs average). Occupancy was maintained at 100%.

Divested Cross Street Exchange to pivot towards logistics.

• Frasers Logistics & Commercial Trust completed the sale of leasehold property at 18, 20 and 22 Cross Street, also known as Cross Street Exchange (CSE), for S$810.8m in Mar 22. The consideration represents a 28.3% premium to book value of S$632.0m as at Sep 21.
• The divestment of the non-core leasehold CBD commercial property is in line with Frasers Logistics & Commercial Trust’s portfolio rebalancing towards the logistics and industrial asset class. Assuming 49.2% of the net proceeds are used to repay outstanding debt, Frasers Logistics & Commercial Trust’s aggregate leverage is expected to be lowered by 4.4ppt from 33.7% % to 29.3% on a pro forma basis.
• 50.8% of the net proceeds from divestment of CSE are expected to be deployed for acquisitions of logistics and business park properties.

Reinvest in logistics properties and suburban office.

• Frasers Logistics & Commercial Trust has committed S$290.5m of capital into acquisitions of one suburban office building, three completed logistics properties and one logistics property under development:
  1. Frasers Logistics & Commercial Trust completed the acquisition of a freehold five-storey grade A suburban office building with NLA of 78,540sf at Mount Waverly, Melbourne for A$60.3m in May 22. The property is fully leased to nine tenants, including two retail tenants on the ground level, with long WALE of 5.0 years.
  2. Acquisition of three freehold logistics properties in Truganina, an industrial precinct within the City of Monash at Melbourne West, for A$61.0m. The properties were newly completed in May 22 and fully leased to four tenants with long WALE of 6.6 years and fixed annual rental escalation of 3.0%.
  3. Acquisition of a freehold logistics property to be developed at Ellesmere Port, Cheshire in Northwest England for £101.0m (S$171.7m). The property sits on a 14.4ha site and has total NLA of 667,185sf. It is expected to complete in 2H23 and will be leased to Peugeot Motor, a subsidiary of global automaker Sellantis Group, for 15 years. The property will serve as the national distribution centre for Peugeot Motor in the UK.

Frasers Logistics & Commercial Trust - Earnings forecast revision and recommendation

• We cut FY22 DPU forecast for Frasers Logistics & Commercial Trust by 6.5% to factor in divestment of CSE and raised FY23 DPU forecast by 3.0% to factor in contributions from recent acquisitions.
• Maintain BUY recommendation on Frasers Logistics & Commercial Trust. Our target price of S$1.60 is based on DDM (cost of equity: 7.25%, terminal growth: 2.5% (previous: 2.8%)).
• 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.
• Catalysts:
  • Continued growth and expansion by tapping on sponsor pipeline of logistics and business park properties.
  • Development projects at Blythe Valley Park and Farnborough Business Park. Partnering sponsor Frasers Property will develop logistics properties in Australia and Europe.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-09-08

SGX Stock Analyst Report BUY MAINTAIN BUY 1.60 DOWN 1.650