DBS Group Research and CGS-CIMB have maintained their “buy” and “add” calls on Frasers Logistics Commercial Trust (FLCT), with target prices of $1.43 and $1.60 respectively.
DBS analysts Dale Lai and Derek Tan said the target price was raised from the previous target price of $1.40 due to net accretion from the sales and purchase of three properties announced on Aug 4 - two freehold properties in Australia and the UK, coupled with the divestment of the remaining 50% stake in a logistics property in Australia- as well as lower discount rates mainly from lower risk-free and interest rates.
The freehold property in Australia is a logistics property in Melbourne that is fully leased to IVE Group, while the property in UK is the Maxis Business Park just outside of London. These two properties will be acquired at about a 1.2% discount to the agreed property value. They are currently 100% occupied and have a long Weighted Average Lease Expiry (WALE) of 4.9-6.7 years. The total transaction cost of $92.4 million will be fully funded by existing debt facilities or internal resources.
At the same time, it announced the divestment of its remaining 50% stake in 99 Sandstone Place for A$152.5 million ($149.7 million), a 12.2% premium above its July 2020 book value. FLCT expects to record a net gain of A$8 million from this sale.
Lai and Tan said they remain excited about the plans in FLCT’s pipeline that amounts to more than $5 billion across key gateway cities of Singapore, Australia and Europe (including UK).
They anticipate the REIT to be active in acquiring assets to continue to bulk up and grow its asset under management (AUM) in the medium term.
Coupled with expectations for interest rates to remain lower for longer and the tightening in FLCT’s yield, “we believe that conditions are conducive for accretive acquisitions to be considered.” the analysts said.
However, they warn that the ongoing COVID-19 outbreak is expected to create some weakness in FLCT’s portfolio, as evident in the marginal dip in occupancies and rental reversions.
But Lai and Tan said “the annual rental escalations, which range from 2-4%, along with the positive rental reversions at some of its newly consolidated commercial assets, will help mitigate these short-term pressures.”
FLCT has a very small percentage of its portfolio lease expiring in the next two years, which stands at 1% and 8.1% in FY20 and FY21 respectively.
Similarly, CGS-CIMB analysts Lock Mun Yee and Eing Kar Mei also concur largely with the outlook above, but they also highlight the REIT’s stable portfolio occupancy and active leasing made in Q3.
They elaborated that overall portfolio occupancy stood at 97.2%, with a long weighted average lease to expiry (WALE) of 5.2 years. During the quarter, FLCT saw active leasing activities, with around 135,000 sq m of renewals and new leases, representing 5.2% of its portfolio lettable area.
The bulk of leasing activities were in the logistics and industrial segment, where it recorded a negative rental reversion of -3.9%. In Singapore, its rental reversions were positive and averaged 10.6%, particularly post the asset enhancements undertaken at Cross Street Exchange and Alexandra Technopark.
They also note that FLCT has a remaining 1% of gross rental income due for renewal in 4QFY20 and a further 8.1% in FY21F, largely in Australia.
Overall, Lock and Eing likes the stock as it has “visible inorganic growth potential and income resilience, backed by a long WALE”.
Apart from the announcement of FLCT’s sale and purchase on Aug 4, the REIT also announced its 3Q20 results in a business update, which saw an 83.5% y-o-y growth in distributable income to $61.1 million. This is the first financial quarter for FLCT as an enlarged REIT following the merger of Frasers Logistics Trust (FLT) and Frasers Commercial Trust (FCOT) in April.
Revenue for the quarter came in 91.9% y-o-y higher at $103.7 million. Adjusted net profit income (NPI) stood 77.0% higher y-o-y at $78.0 million.
See: Frasers Logistics & Commercial Trust posts 83.5% higher distributable income of $61.1 mil in 3Q20 business update
According to the DBS analysts, the benefits of FLCT’s diversification post-merger are becoming apparent. “Despite the slight weakening of selected portfolio and capital management metrics inherited from FCOT, the enlarged FLCT is now much stronger to tackle the challenging business climate amid the Covid-19 pandemic,” they add.
As at 2.02pm, units of FLCT were trading flat at $1.37 and at a P/BV value of 1.29. Dividend yield is forecasted by DBS to be at 5.2% and by CGS-CIMB to be at 5.52%.
