Citi Research’s Brandon Lee, CGS International’s Lock Mun Yee and Natalie Ong, DBS Group Research’s Dale Lai and Derek Tan and the team at OCBC Investment Research (OIR) have maintained their “buy” and “add” calls on Frasers Logistics and Commercial Trust (FLCT) following the release of its 1HFY2024 results ended March 31.
While the analysts at Citi Research, CGSI and DBS Group Research have maintained their target prices of $1.24, $1.27 and $1.44 respectively, the OIR team has trimmed its target price from $1.37 to $1.35.
The lowered target price is due to the OIR team factoring in FLCT’s German acquisitions and incorporating a lower Australian dollar (AUD) relative to the Singapore dollar (SGD). The team has also upped its risk-free rate input from 2.75% to 3%.
That said, the team remains positive, citing FLCT’s “defensive profile” as one of its investment merits. FLCT has a high portfolio occupancy rate, healthy balance sheet and long weighted average lease to expiry (WALE) with manageable lease expiries in FY2024, the team notes.
FLCT’s distribution per unit (DPU) for the 1HFY2024, which dipped by 1.1% y-o-y to 3.48 cents, came in line with OIR’s expectations at 50.2% the team’s initial FY2024 forecast.
“Management highlighted that its intention for FY2024 is to utilise divestment gains to ‘keep its DPU fairly stable’,” writes the OIR team.
FLCT’s lower portfolio occupancy rate was not unexpected, though its rental reversions remained “solid”, the team adds.
FLCT’s 1HFY2024 DPU also stood in line with the projections of DBS’s Lai and Tan.
Noting that the REIT’s logistics and industrial (L&I) portfolio remains fully occupied, while its commercial portfolio saw lower occupancy rates, the analysts see FLCT’s L&I portfolio remaining “integral” to its earnings.
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Meanwhile, the REIT reported “strong positive” rental reversions of +14.2% in 2QFY2024 across both the L&I and commercial portfolio segments. For the 1HFY2024, the portfolio’s average rental reversions stood at a positive 18.3%, which reflects FLCT’s “sustained strength” in rental renegotiations.
“Looking ahead, rental reversions are expected to continue to remain in healthy, positive territory for the rest of FY2024. The current market rents exceed the passing rents of the L&I portfolio, indicating favourable conditions for future lease renewals and potential rental uplifts,” say Lai and Tan.
In FY2024, the analysts see developments and asset enhancement initiatives (AEIs) driving the next leg of FLCT’s growth, complementing its acquisition plans over the same year.
“In addition to the recently completed development of Ellesmere Port (UK), FLCT also has another ongoing development in Maastricht (Netherlands). We understand that the REIT will continue to focus on acquiring assets with development opportunities as well as fund other development projects,” they write.
FLCT also has the largest right of first refusal (ROFR) pipeline from its sponsor that’s valued at over $5.0 billion. The pipeline could double the REIT’s portfolio, giving it “visibility like no other”, Lai and Tan add.
“[The REIT's] currently low gearing also provides [FLCT] with ample debt headroom to fund acquisitions,” they note.
To Citi’s Lee, FLCT’s results may have been in line with his expectations especially with the continued strength of its L&I business. However, the analyst is expecting the markets to react negatively in the short-term due to the REIT’s higher-than-expected divestment gains but mitigated by its in-line results and strong L&I segment.
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While FLCT has renewed five leases at ATP with a total net lettable area (NLA) of around 54,000 square feet in 2QFY2024 and filled up Google’s vacated space, Lee sees that the market is currently “fairly challenging” with a lot of supply, even though inquiry levels have improved and that the discussions with several parties are progressing.
CGSI’s Lock and Ong have kept their estimates for the FY2024 to FY2026 in addition to their unchanged target price as FLCT’s DPU stood above their expectations at 52% of their full year forecast.
The analysts like the REIT’s “robust” balance sheet as gearing stood at 32.7% as at the end of 1HFY2024, which reflects an estimated debt headroom of $851 million.
“Following the purchase of German L&I assets from its sponsor in March this year, FLCT said it continues to evaluate acquisition opportunities, including potential investments in data centres,” says Lock and Ong.
The analysts also like that the REIT has announced its intention to focus on developed markets for new acquisitions and to leverage its sponsor’s pipeline for growth opportunities.
As at 1.59pm, shares in FLCT are trading at an unchanged $1.01.
