The team at DBS Group Research is expecting shares in Frasers Property to take a tumble, noting that stocks “generally do not respond well to a profit warning”.
However, the team believes that much of the negatives have already been priced in at the group’s current valuations, which is at 0.3x P/B or 0.2x P/RNAV.
The team reinstated a “buy” on Frasers Property on Sept 14 with a target price of $1.21.
On Oct 12, Frasers Property guided that it expects to see fair value losses on a portion of its portfolio of investment properties especially those in the UK in its results for the FY2023 ended Sept 30.
“Taking into account the above, the group expects to report a significant decrease in attributable profit for FY2023 as compared to the previous financial year,” said the group in its Oct 12 statement.
“Nevertheless, the group’s overall business performance and core operating earnings have not been significantly impacted as compared to the previous financial year, and the group expects to remain profitable for FY2023,” it added.
See also: Test debug host entity
To the DBS team, the profit warning may be a “natural bummer” but most developers have already begun to report fair value losses for their property exposures in UK and Europe in the 1HFY2023.
“We note that Frasers Property reported core operating earnings of $398 million in [its] FY2022 results ($928 million including fair value gains) and as of 1HFY2023, reported $200 million in core operating earnings after accounting for perpetual coupons,” the team writes.
“Compared against our FY2023 estimate of $277 million, we remain comfortable that our overall estimates are conservative. We do not see a significant deviation in dividends of 3.0 cents (in FY2022) which is backed by recurrent operating cashflows,” it adds.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
However, the team estimates that the upcoming fair value losses are expected to impact Frasers Property’s net asset value (NAV) of $2.57 per share negatively.
Based on its last reported results in the 1HFY2023, the group’s exposure to Europe including UK is about 20% of its overall asset base of $34.2 billion.
“If we assume up to a 30% decline in valuation in Europe, its overall financial metrics will still remain comfortable (Net debt/equity will still remain [less than] 0.9x) compared to its requirement to keep net debt/equity to [less than] 1.5x,” says the team.
“Even if we assume that its Australia assets (c. 27% of assets), together with its European properties are revalued lower by up to [around] 30%, we will see its debt-to-equity (D/E) ratio rise to [around] 1.0x, which still provides for comfortable headroom from its financial covenants,” it adds.
Meanwhile, the reported revaluation losses from Frasers Property is also a possible read-through to the results for the group’s REITs, Frasers Logistics & Commercial Trust (FLCT) and Frasers Hospitality Trust ACV (FCT), both of which are due to report sometime in late October.
“Per our report [which states that the concerns on Australia and Europe are overdone for Singapore industrial REITs], we anticipate some form of NAV erosion to happen for FLCT but compensated by stronger rent growth potential in Australia logistics assets, improving overall cashflows,” says the team.
“Its low gearing of [less than] 30% puts FLCT in a good position to weather any storm on the valuation front. For FHT, we believe that the erosion is likely to be even lesser, which expected robust operating metrics for its hospitality assets to more than compensate for the rise in cap rates for its UK / European hotels ([around] 20% of assets),” it adds.
Frasers Property is slated to report its FY2023 results after the market closes on Nov 10.
As at 3.42pm, shares in Frasers Property are trading 1 cent lower or 1.24% down at 80 cents.
