Felicia Tan Published on Wed, Jun 23, 2021
By The Edge Singapore
Analysts from DBS Group Research and UOB Kay Hian are maintaining their “buy” calls on Frasers Logistics & Commercial Trust (FLCT).
FLCT invests in income-producing properties that are used mainly for logistics, commercial or office spaces or business park purposes.
Its portfolio focuses primarily in the Asia Pacific region and Europe.
As at June, FLCT has a portfolio of 103 properties valued at a total of $6.8 billion across five developed markets – Australia, Germany, Singapore, the Netherlands and the UK.
UOB Kay Hian has resumed its coverage on the REIT on June 22, with a target price of $1.79, while DBS has kept its target price of $1.85.
To DBS’s Dale Lai and Derek Tan, FLCT is the cheapest large-cap logistics REIT in Singapore despite its more expensive price per unit. Based on their target price estimate, FLCT’s target yields are 4.2% to 4.3% for the FY2021 and FY2022, “which is fair given its substantially freehold portfolio,” they say in a June 21 report.
“In our view, there is room for further compression if we compare FLCT to its large-cap peers which are trading at target yields of 3.5%-4.0%,” they write.
The REIT’s recent acquisitions will also drive its distribution per unit (DPU) growth upward going into the FY2021 to FY2022.
Since the merger between Frasers Logistics Trust and Frasers Commercial Trust, FLCT has acquired over $600 million worth of assets from its sponsor.
Despite this, the REIT still has the largest right of first refusal (ROFR) pipeline that’s valued at over $5 billion that could double its portfolio, making this a “visibility like no other” for the REIT.
On this, Lai and Tan project a robust 8% DPU growth in FY2021 that’s driven by full-year contribution from its enlarged portfolio as well as subsequent acquisitions with an additional 2% DPU growth in FY2022 as it builds on its organic growth strategy.
The DBS analysts’ estimates have not factored in any further acquisitions as yet. The potential drop to its P/NAV from 1.3 times to 1.0 times is not priced in yet, either.
That said, the REIT’s significantly larger portfolio of $6.8 billion means it has the capacity to undertake development projects or redevelopment of older assets that could increase its earnings potential in the longer term.
However, one of the REIT’s key risks is its exposure to currency fluctuations in AUD, EUR and the British pound, as it pays its distributions in SGD, something the manager has attempted to reduce by hedging distributions regularly.
To UOB Kay Hian analyst Jonathan Koh, FLCT is a beneficiary of the structural change in Australia as households are increasingly switching to online retail.
FLCT’s yields are also compressed by an average of 51 basis points y-o-y in 1QFY2021.
Germany, which FLCT has properties in, is seeing a strong economic recovery. This is supported by the country’s manufacturing sector and continued growth in e-commerce.
“We expect FLCT to pivot toward the New Economy through expansion in logistics and business park properties,” writes Koh.
“FLCT provides a distribution yield of 5.7% and yield spread of 4.2% for FY2022, much more attractive than Mapletree Logistics Trust’s 4.2% and 2.7%. It trades at P/NAV of 1.21 times compared with peers’ 1.47 times,” he adds.