Cash is king
- Portfolio occupancy rate and rental reversions continue uptrend; CSE divestment completed
- Earlier than expected acquisition with >$300m cash balance could provide upside surprise
- Potentially higher capital distribution from CSE divestment could be a nice surprise for FY22
- Maintain BUY with a revised TP of S$1.75
Investment Thesis
Large-cap logistics REIT with the largest debt headroom. With a gearing of less than 30%, FLCT has the lowest gearing amongst its peers and a debt headroom c.S$1.3bn before gearing reaches 40%. Following its recent divestment, FLCT also has a large cash balance of c.S$300m that it can immediately deploy to fund an acquisition and drive further accretion to earnings.
ROFR pipeline from sponsor is worth more than S$5.0bn. Since its merger with FCOT, the REIT has acquired more than S$600m worth of assets from its sponsor. Despite this, FLCT still has the largest ROFR pipeline, valued at more than S$5.0bn, which could double its portfolio, providing a visibility like no other. Its current low gearing also provides it with ample debt headroom to fund acquisitions.
Development and AEI projects to drive next leg of growth.
Having acquired more than S$562m worth of assets in FY21, we believe that development and AEI projects will complement further acquisition plans in FY22. In addition to the ongoing development of the three-hectare vacant plot at Connexion II, FLCT has also recently forward-funded a prime warehouse development in the UK. We understand that the REIT will continue to focus on acquiring assets with development opportunities, as well as fund other development projects.
Valuation:
Our DCF-based TP of S$1.75 is based on an assumed discount rate of 5.9% (risk-free rate of 3.0%). We have assumed c.S$350m of acquisitions in our projections.
Where we differ:
Exploring development projects. With a large cash balance of c.S$300m and ample debt headroom, we believe FLCT has the capacity to fund its next acquisition by cash and debt. As such, we have assumed a c.S$350m acquisition at a yield of c.4.5% by the end of FY22. A larger-than-projected acquisition or one that is completed sooner-than-anticipated could lead to an upside to our estimates.
Key Risks to Our View:
Currency risk. As the manager pays its distributions in SGD, the REIT is exposed to currency fluctuations in AUD, EUR, and GBP. The manager attempts to reduce foreign currency fluctuations by hedging distributions regularly.