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2HFY21: Benefitting From Revaluation Gains And Lower Cost Of Borrowings

FLT benefitted from the acquisition of six European properties completed on 24 May 21 which provided more than four months of contributions. Cost of borrowings improved 0.3ppt yoy and 0.1ppt qoq to 1.6% due to lower base rates and lower interest rates for
borrowings refinanced in 2HFY21. Valuation uplift was 9% or S$603.9m and NAV per unit increased 12.7% yoy to S$1.24. Distribution yield is attractive at 5.1% for FY22 and 5.2% for FY23. Maintain BUY. Target: S$1.79.

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RESULTS

• Frasers Logistics & Commercial Trust (FLT) reported 2HFY21 DPU of 3.88 S cents (+6.3% yoy), which is in line with our expectations.

Growth from acquisitions and organic rental escalation. Revenue and NPI increased 11.4% and 12.3% yoy respectively in 2HFY21 due to acquisition of six European properties completed on 24 May 21 (more than four months of contributions), which was partially offset by divestment of three leasehold logistics properties in South Australia.

Upward pressure on rents for logistics space. FLT has completed 151,975sqm of new/renewed leases in 4QFY21. In Australia, rents for logistics space in Sydney, Melbourne and Brisbane increased 3.7%, 8.3% and 3.5% yoy respectively to A$149, A$102 and A$119 per sqm per year. Rents in Germany and Netherlands are currently €90 and €85 per sqm per year respectively and there is upward pressure due to strong take-up and limited supply. However, market rents have generally not kept up with the recurrent and compounding annual escalation of 3.1%, which resulted in negative rental reversion of 3% in 4QFY21. The commercial portfolio achieved positive rental reversion of 0.2%, driven by positive rental reversion of 0.9% for properties in Singapore.

Logistics properties maintained full occupancy. FLT’s logistics properties in Australia, Europe and the UK maintained full occupancy at 100% as of Sep 21. Occupancy for commercial properties was stable at 91.5%. Occupancy at Central Park in Perth, Australia improved 2.1ppt qoq to 84.4% after completing asset enhancement initiative, offset by slight deterioration of 2.2ppt to 96.5% for Alexandra Technopark in Singapore.

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Core logistics portfolio recorded sizeable valuation gains. FLT’s portfolio saw uplift of 9% or S$603.9m based on valuation as of Sep 21. Cap rates compressed by 105bp to 4.85% for logistics properties in Australia and by 46bp to 4.28% for Germany and Netherlands. The logistics portfolio benefitted from strong investment demand and growth from e-commerce. For the commercial portfolio, Central Park and Alexandra Technopark registered healthy gains of S$21.7m (+7.1%) and S$33m (+5.3%) respectively. NAV per unit increased 12.7% yoy to S$1.24.

Finance costs dropped 19.1% yoy to S$22.3m in 2HFY21. Cost of borrowings improved 0.3ppt yoy and 0.1ppt qoq to 1.6% due to lower base rates and lower interest rates for borrowings refinanced in 2HFY21.

Well spread-out debt maturity profile. Aggregate leverage was lowered by 2.7ppt qoq to 33.7% due to the valuation uplift. Interest coverage ratio improved 0.3x qoq to 7.3x. Borrowings due in 4QFY21 have been refinanced by 7-year fixed rate notes issuance of S$150m at 2.18% under the Sustainable Finance Framework. Green and sustainability-linked financing accounted
for 54% of total borrowings. 95% of the borrowings due in FY22 will mature in 2HFY22.

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STOCK IMPACT

Sizeable sponsor pipeline supports future growth. FLT has right of first refusal to acquire logistics properties with NLA of 2.0m sqm in the Asia Pacific region and Europe from sponsor Frasers Property (FPL). The acquisition pipeline is valued at more than S$5b as of Jan 21. FPL is also actively developing more logistics properties and the sponsor pipeline expands at a rate of about S$200m per year. We expect FLT to pursue strategic acquisitions of logistics properties in Europe and business park properties in the UK. In particular, FLT could leverage on low cost of €-denominated loans to finance acquisitions in Europe.

Value creation through development. Newly-acquired Blythe Valley Park located near Birmingham and within UK’s Golden Triangle has 3 hectares of vacant land, which could be developed into additional logistics space. FLT plans to develop the site into four units of logistics warehouses. Management has conducted evaluation and expects the development to be viable.

• Similarly, Farnborough Business Park located in Thames Valley has an office development site (Plot C, Pinehurst III & IV), with planning permission for a commercial building with 18,000sqm of office space. Management is reviewing feasibility to redevelop the site into a last-mile ecommerce fulfilment centre instead given its proximity to Farnborough Airport and a high density residential catchment.

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• FLT is also looking at partnering sponsor FPL to develop logistics properties in Australia and Europe.

Core holding included in major indices. FLCT is a constituent of FTSE EPRA NAREIT Developed Index and FSSTI. Freehold properties made up 81.3% of FLCT’s total assets under management (AUM). It has a long WALE of 4.8 years.

EARNINGS REVISION/RISK

• We kept our DPU forecast relatively unchanged.

VALUATION/RECOMMENDATION

Buying yield and growth from logistics. FLCT provides a distribution yield of 5.1% for FY22, much more attractive than Mapletree Logistics Trust’s 4.0%. It trades at P/NAV of 1.34x compared with peers’ 1.61x.

Maintain BUY. Our target price of S$1.79 is based on DDM (cost of equity: 6.25%, terminal growth: 2.0%).

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SHARE PRICE CATALYST

• Continued growth and expansion by tapping on sponsor pipeline.

• Development projects at Blythe Valley Park and Farnborough Business Park. Partnering sponsor FPL to develop logistics properties in Australia and Europe.