SINGAPORE (Dec 3): CGS-CIMB Research is staying positive on Frasers Logistics & Industrial Trust (FLT) and Frasers Commercial Trust (FCOT), after the respective managers on Monday announced a proposed merger to create an enlarged REIT with a total portfolio worth a total of $5.7 billion.
According to the managers, the enlarged REIT will have a market capitalisation of $4.2 billion and a free float of $3.0 billion, which would put it among the top 10 Singapore REITs.
See: Frasers Logistics & Industrial Trust to acquire Frasers Commercial Trust for $1.54 bil in proposed merger
“We think there is positive re-rating potential given the enlarged entity,” says CGS-CIMB lead analyst Lock Mun Yee in a flash note on Tuesday.
The way Lock explains it, the enlarged entity could also lead to an increase in its weightage in the FTSE EPRA/NAREIT Index, which would result in higher trading liquidity and possibly a wider investor base.
The proposed merger will be by way of a trust scheme of arrangement, with FLT acquiring all units of FCOT in exchange for a combination of cash and new units in FLT.
The total consideration for the proposed merger is approximately $1.54 billion, comprising $138.1 million in cash and 1,128.1 million consideration units.
Unitholders of FCOT will receive $1.68 for each FCOT unit held at the books closure date. This will comprise 15.1 cents per unit in cash and 1.233 new FLT units at an issue price of $1.240 per unit, representing a gross exchange ratio of 1.355 times.
The scheme consideration represents a 0.6% premium to FCOT’s last traded price of $1.67 on the last trading date of Nov 27. It is also a 3.5% premium to FCOT’s 1-month volume weighted average price (VWAP) and an 8.2% premium to its 12-month VWAP.
In conjunction with the proposed merger, FLT announced the proposed acquisition of 50% interest in Farnborough Business Park (FBP) from a wholly-owned subsidiary of sponsor Frasers Property for an estimated consideration of £90.1 million ($157.7 million), subject to post-completion adjustments.
The remaining 50% interest in FBP is currently indirectly held by FCOT. Upon completion of the proposed asset acquisition, the enlarged REIT will hold 100% of the interest in FBP.
FBP is a 46.5 ha freehold high-quality business park located in the Thames Valley in the United Kingdom. With a net lettable area of approximately 50,882 sqm, the business park has a high committed occupancy rate of 99.1% and long weighted average lease expiry (WALE) of 6.8 years as at Sept 30, 2019.
The proposed merger and the proposed asset acquisition will be DPU accretive on a pro forma basis for both FLT unitholders and FCOT unitholders by 2.2% and 4.2% respectively.
“Stripping out the acquisition of FBP, the pro-forma FY19 DPU accretion from the merger alone would be 0.6% (for FLT) and 2.5% (for FCOT),” Lock says. “The larger FLT portfolio size also enhances diversification and portfolio resilience as its exposure by value to any single asset and geography will be lower than 12% and 50%, respectively.”
Lock notes that post-merger, FLT’s exposure to its top 10 tenants by gross rental income would also be lowered to 24% on a pro-forma basis. Meanwhile, based on a 45% ceiling, potential debt headroom could increase to $868 million, she adds.
“Additionally, we are positive on the FBP acquisition due to the DPU accretion and its embedded growth potential,” Lock says.
With the proposed merger still pending approvals from both sets of unitholders, CGS-CIMB is keeping its “add” ratings on both FLT and FCOT with target prices of $1.31 and $1.71 respectively.
As at 4.13pm on Tuesday, units in Frasers Logistics & Industrial Trust are trading flat at $1.24 while units in Frasers Commercial Trust are trading 4 cents lower, or down 2.3%, at $1.67.
