OCBC Investment Research (OIR) and Citi Research have maintained their respective “buy” calls on Frasers Logistics & Commercial Trust BUOU (FLCT) following its 2HFY2024 ended Sep 30 results.
However, citing a softer market and forex volatility, they have lowered their target prices to $1.28 and $1.16 from $1.35 and $1.24, respectively.
Morningstar, meanwhile, gives FLCT a “three-star” rating and a fair value estimate of $1.14.
For its 2HFY2024, distribution per unit (DPU) declined 5.7% y-o-y to 3.32 cents, no thanks to a 45.6% jump in finance costs to $36.4 million, but partially offset by higher capital distributions from divestment gains.
NPI for 2HFY2024 was $124.9 million, down 5.1% Y-O-Y. This brings full year FY2024 NPI to $32 million, up 2.7%. Full year DPU, meanwhile, was down 3.4 % y-o-y to 6.80 cents.
This forms 98.6% of OIR’s forecast including $41.7 million of capital distributions from divestment gain, which was 2.6 times of FY2023’s $16.1 million.
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However, FLCT’s DPU fell short of what Morningstar analyst Xavier Lee was expecting. He attributes this to higher-than-expected borrowing costs and management opting to take all its second-half management fees in cash instead of units.
The fees included those incurred from the recent share swap exercise between two of Fraser Property’s (FPL) major shareholders, InterBev Investment and TCC Assets.
FLCT’s 2HFY2024 adjusted net property income (NPI) increased by 3.7% y-o-y to $161.3 million.
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Portfolio occupancy
In 4QFY204, FLCT was able to achieve portfolio rental reversions of 26.8%, with 36.4% growth for its labour and industries (L&I) portfolio and 0.6% growth in its commercial portfolio.
However, OIR notes that there is a slight negative rental reversion of 2.9% for its Alexandra Technopark property, as management continues to look for replacement tenants for space vacated by Google, which was one of the single largest tenants.
FLCT’s management has backfilled 25% of the first tranche of space vacated by Google in Feb 2024, with secured pre-commitment for 15% of the space given back in Dec 2024.
“Current leasing momentum has been affected by the slowdown in decision making of prospective tenants,” OIR adds.
For FY2024, overall portfolio rental reversions came in at 23.6%.
FLCT notes that its L&I portfolio remained under-rented with the biggest upside potential in Australia, UK, Netherlands and Germany.
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On Oct 10, FLCT announced that it secured the lease renewal with its largest tenant, the Commonwealth of Australia at its Caroline Chisholm Centre (CCC) property in Australia until 2037.
This removes the overhang over its largest tenant which contributes 4.5% of its gross rental income.
However, OIR notes that the renewal came with a negative rental reversion of below negative 10% on an incoming rent compared to an outgoing rent basis.
FLCT’s portfolio occupancy fell by 0.5 percentage points (ppt) q-o-q to 94.5%, with its L&I and commercial portfolios recording sequential dips of 0.6 and 0.1 ppts, respectively.
OIR states that FLCT has since backfilled vacancies at its L&I assets back to 100%.
Morningstar’s Lee remains positive about FLCT’s maiden acquisition of a logistics property in Singapore, located near Tuas Mega Port and has an occupancy rate of 85.8% as at end-September 2024.
According to management, there is a two-year occupancy guarantee and rent-free top-up from the seller, and the stabilised yield is estimated to be 6.9%.
Morningstar’s Lee believes the attractive yield is because of the property's low remaining leasehold tenure of 22 years.
“Nevertheless, management estimates that the transaction will result in a 1.7% accretion to its pro forma fiscal 2024 first-half DPU,” Lee adds.
Gearing
FLCT announced a decrease in aggregate leverage ratio from 33.2% to 33%, leaving FLCT with $801 million debt headroom before reaching 40%.
FLCT has 73.3% of its debt fixed, with a high but declining interest coverage ratio of 5 times.
Cost of debt rose 30 basis points (bps) q-o-q to 3.1% on a trailing three-month basis and management expects this to increase to mid-3% for FY2025 due to refinancing of low-cost debt.
Looking ahead
OIR cut its FY2025 DPU forecast by 2.2% and roll forward their valuations with a slightly lower cost of equity assumption of 6.56% and reduced terminal growth rate of 1.25%.
According to OIR, reduced terminal growth is “underpinned by constant FX volatility, more moderated growth in core logistic markets and potential trend of increasing its exposure in Singapore which has shorter land lease tenors.”
“We have pushed back our lease-up assumptions for its UK business parks given the slow progress, raised our borrowing cost forecasts, and lowered our ratio of management fees taken in units to 50% from 70%,” Morningstar’s Lee notes.
As such, Lee has cut his fiscal 2025 to 2027 DPUs by 2.9% to 6.2%.
Citi analyst Brandon Lee has cut his FY2025 and FY2026 estimated DPU by 4.8% and 8.7% to 6.76 cents and 6.80 cents, respectively.
FY2027 estimated DPU is 6.78 cents.
Citi’s Lee attributes this to lower NPI margins, management fees in units and higher debt cost, mitigated by divestment gains.
As at 2.21pm, units in FLCT are trading flat at $1.
