DBS Group Research analysts Dale Lai and Derek Tan have kept their “buy” call on Frasers Logistics and Commercial Trust (FLCT) following its 2HFY2022 ended September results announcement.
FLCT’s FY2022 DPU of 7.62 cents came slightly below the analysts' projections. This is mainly due to weaker foreign currencies against Singapore dollar as well as slower-than-expected pace of acquisition following the divestment of Cross Street Exchange.
Its FY2022 distributable income increased by 4.3% y-o-y, while revenues and net property income declined by 4.1% and 3.7% y-o-y respectively. This is due to the Cross Street Exchange divestment, partly offset by acquisitions in Australia and the UK.
Proceeds from divestment have mostly been used to repay loans, leading to lower financing costs in FY2022, the analysts point out.
FLCT’s portfolio occupancy remained stable at 96.4%, with only about 10% of portfolio leases due for expiry in FY2023. The trust also achieved positive rental reversions of 9.8% in 4QFY2022, while FY2022 rental reversion stood at a strong 6.2%.
The REIT also achieved 6.5% uplift in portfolio valuations, driven mainly by underlying rent growth. This leads to a gearing improvement to 24.7% and an ample debt headroom of more than $3.2 billion.
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“Despite concerns of potential cap rate expansion, the strong growth in underlying rents will help FLCT maintain its portfolio valuations,” the analysts say.
They continue to remain positive on FLCT, given its healthy portfolio fundamentals and continued positive rental reversions. Given how quickly market rents for logistics and industrials (L&I) have grown over the past year, FLCT’s assets are now under-rented, they add.
Although FLCT has about $190 million in capital gains it can tap into, the REIT will be very disciplined in utilising it for capital distributions, the analysts highlight.
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“FLCT has paid out about $8.2 million in capital distributions in FY2022 to offset the absence of income from Cross Street Exchange, and is expected to continue paying out capital distributions in the near term. However, the amount of capital distributions will be limited to the amount required to offset the absence of income from the divestment, and will not be used to top up any decline in income from foreign exchange (FX) losses or higher financing costs.
“We have thus revised our projections to account for the weaker AUD, EUR, and GBP against the SGD. Furthermore, we have also assumed higher financing costs in the next two years given the rising interest rate environment,” the analysts say.
After accounting for weaker foreign currencies and higher financing cost assumptions, the analysts have revised their target price to $1.55 from $1.75 previously. The analysts expect FLCT to generate a forward dividend yield of about 6.5% at the current prices.
“We understand that FLCT continues to actively look out for accretive acquisitions and would likely see some growth opportunities in FY2023. However, given the uncertain economic conditions and volatile FX and interest rate environment, we have decided to remain conservative and not include any acquisition assumptions.
“This will provide an avenue for upside surprises to our projections whenever any accretive acquisitions are identified,” the analysts conclude.
As at 10.52am, units in FLCT are trading 2 cents higher or 1.68% up at $1.21.
