Frasers Logistics and Commercial Trust (FLCT) fell 3.5 cents on Nov 22 following a downgrade by JP Morgan on Sept 21. Analysts Terence Khi and Mervin Song downgraded the REIT to a non-consensus underweight with a lower end-December target price of 85 cents versus its last traded price of 90 cents. The two analysts are expecting an 8% decline in distributions per unit (DPU) over the next two years.
FLCT, which has a Sept year-end, missed analysts' estimates for FY2024 when it reported a DPU of 6.8 cents, down 3.4% y-o-y. According to FLCT's FY2024 results, there were higher vacancies in Alexandra Technopark and 357 Collins Street Melbourne, as well as higher property operating expenses, as a result of higher non-recoverable land taxes in Australia. Finance costs also increased during the FY due to the increase in interest rates and additional borrowings drawn for capital expenditure.
Going forward, JP Morgan says FLCT faces further challenges. These include headwinds from refinancing mid-1% Euro debt to mid to high 3% over FY2025; slow pace backfilling of Google space being fully vacated by December 2024 (5% of group revenue); and proportion of fee in units being reduced to 50% from 100% previously, to prevent any shareholder from owning more than 10% of FLCT on a look through basis in Australia.
On Oct 17, after the FY ended, FLCT announced the acquisition of 2 Tuas South Link 1 for $140.3 million.
"We believe FLCT’s level of capital top-ups and DPU remains unsustainable. Even if acquisitions were to bring gearing from 34% to 40%, we estimate FLCT can only deliver annual DPU of 5.21-5.76 cents which is 15%-23% below consensus estimates for FY2025 of 6.8 cents. We see FLCT as a key avoid until its DPU resets lower. There is also overhang from guidance that FLCT’s sponsor may pare its holdings (fees in units received) to avoid tax complications with its Australian managed investment trust (MIT) structures," Khi and Song say.
JP Morgan is projecting an 8% decline in DPU over the next two years. "In hindsight we should have turned bearish earlier," the duo say.
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The analysts also believe that the REIT's current capital top-ups (of $41.7 million in FY2024) are not sustainable. "We believe FLCT’s capital top-ups are unsustainable even if FLCT uses its $657 million debt headroom and pushes gearing to 40% from 34% post its recent Singapore purchase. Currently we assume a $40 million top-up representing 17% of FY2025 DPU, and a $25 million top-up representing 12% of our FY2026 DPU," JP Morgan says.
According to the duo, if FLCT acquires Singapore properties on a 7% NPI yield with 3.4% cost of debt, FY2025 DPU would only increase to 5.76 cents. Previously, JP Morgan estimated an FY2025 DPU of 6.20 cents. "Given tight spreads between assets yields and borrowing costs in overseas markets, we estimate FLCT can only deliver 5.21 cents to 5.76 cents," the report says. FLCT ended at 90 cents on Sept 22.
