While property developers typically trade at notable discounts to valuations, Frasers Property TQ5 (FPL) stands out by trading at an even larger discount than most. In our October cover story, Developing Stories, The Edge Singapore’s senior research analyst, Thiveyen Kathirrasan, indicated that FPL was one of two robustly undervalued listed property developers on the Singapore Exchange S68 (SGX).
The main problems with FPL are its small free float and an illiquid balance sheet. TCC Assets, a private company owned by Charoen Sirivadhanabhakdi, holds 58.1% of FPL, while Thai Beverage Y92 holds an additional 28.78%.
ThaiBev’s CEO is Thapana, the elder son of Charoen Sirivadhabhakdi, while FPL’s CEO is Panote, the younger son. The ownership means that FPL’s free float is around 13%, which DBS Group Research says contributes to the share price trading at a discount to book.
“Our understanding through meetings with various institutional investors’ acknowledge its deep discount to book but find it hard to take a meaningful position given its illiquidity, as the stock is trading at less than one million in trading volume due to the sponsor (TCC assets and ThaiBev) collectively owning around 87% of the company,” DBS says in a recent report.
Meanwhile, market watchers wonder if this is the year that FPL’s management takes concrete steps to narrow the discount between share price and net asset value and raise liquidity.
One of the resolutions in FPL’s AGM, held on Jan 24, was its share purchase mandate. FPL’s share purchase mandate limits the group to buy up to 2% of shares outstanding in an FY, as any more would lead to the free float falling below 10%.
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In its FY2023 ended September 2023 letter to shareholders, FPL stated that the share repurchase mandate would not be carried out to such an extent that would result in the company being delisted from the SGX. Since listing in 2014, FPL has not initiated a share buyback.
FPL’s management consistently confronts a pressing question during results briefings: Do they intend to narrow the gap between their traded price and net asset value? In a reply to questions from shareholders dated Jan 18, FPL’s management said: “We understand that shareholders wish to see total shareholder returns (TSR) increase over time. However, share prices are subject to market forces beyond our control, and therefore, our focus remains on improving our returns and earnings and, hence, dividend growth potential and building the foundation of our business to deliver sustainable value to stakeholders over the long term.”
FPL’s price-to-book ratio in October was 0.3 times compared to Hongkong Land’s 0.25 times. As of Jan 22, FPL’s P/B ratio expanded to 0.37 times, partly because share price rebounded and partly because NAV declined to $2.52 as of Sept 30, 2023, compared to $2.64 a year ago.
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As a comparison, Hongkong Land’s book value, as of June 30, 2023, stood at US$14.51 compared to $14.22 as of Dec 31, 2022. Still, its share price performance was weak, and P/B as of Jan 22 is at 0.21 times. This is despite the group’s share buyback programme.
Hongkong Land is taking a different approach to create value, with share buybacks rather than dividends or special dividends, which would have been substantial given the size of the share buyback programme. Since Hongkong Land announced US$1 billion ($1.3 billion) in September and July 2022, as of June 2023, it has US$599 million ($806 million) and reduced its capital by 5.1%.
In January, the Wall Street Journal reported that FPL’s majority owners could sell FPL or some of its assets as part of a strategic review, which triggered some interest in FPL. Subsequently, the company announced via SGXnet that it “has not been informed, and is not aware of, any discussions about the proposed transactions”. The company did announce key management changes from Feb 1.
CEO Panote Sirivadhanabhakdi had said the leadership changes will enable the group to work “together as one enterprise”. Major shareholder ThaiBev also announced management changes from June 27. Thapana Sirivadhanabhakdi — currently the director, president and CEO of ThaiBev — will remain a director of ThaiBev and be redesignated as group CEO.
He will also be appointed as director and first vice-chairman of the executive committee, below his father, Charoen Sirivadhanabhakdi, who remains the executive chairman of the executive committee. Thapana is a director on FPL’s board, and Panote is a director on ThaiBev’s board.
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A more liquid balance sheet?
Share prices of companies with liquid balance sheets tend to trade nearer their NAVs because cash is priced as cash. Conversely, valuations of assets are a combination of art, science, perception and interest rates. FPL’s balance is heavy on assets, with investment properties accounting for 60.7% or $24.2 billion of total assets of $39.8 billion, with total equity at $18.2 billion (including perpetual securities).
In a Jan 5 update, OCBC Credit Research pointed out that “existing property owners, property investors and capital providers (in other words, those that are already long property) are also incentivised to see stability in valuation”.
The report highlights valuations, even those conducted by independent appraisers, may lack precision in reflecting the actual pricing an owner is likely to secure in the investment sales market. This is because “valuers have held off from fully marking down the value of properties” owned by S-REITs to levels “which we think buyers are demanding in the current environment”, according to the OCBC report.
FPL’s business model is similar to that of former property group CapitaLand. Its investment properties provide the group with stable earnings, while sales from development properties boost earnings. Recycling stable properties into its REITs allows FPL to collect fees from property and asset management.
“We do not have a publicly disclosed target for recycling. Unlocking value and capital recycling have been a key aspect of the group’s capital optimisation strategy and the Company will continue to do so,” says a FPL spokesman.
FPL’s FY2023 results show that some 78% of profit before interest and tax (pbit) is derived from recurring income, which rose 4.6% y-o-y to $986 million. Non-recurring income — mainly from development sales — fell by 5.8% y-o-y to $275 million. Altogether, FY2023’s pbit rose by 2.5% y-o-y. Still, revaluation losses in the UK, Europe and Australia caused net profit to dive by more than 80% to $173.1 million.
Despite the dive in net profit, FPL’s dividend rose more than 50% y-o-y to 4.5 cents compared to a 30% payout in FY2022. The FY2023 dividend represented a 51% payout (FY2022: 30% payout) of core earnings before revaluation changes.
The company’s policy recommends a payout of up to 79% of net profit after tax depending on cash requirements, reserves and so on.
In addition to higher dividends, recycling assets is another way to raise liquidity. Between FY2018 and FY2022, FPL’s management points out it has recycled some $7.8 billion through its REITs, capital partnerships and sales of non-core, non-REIT assets to third parties. In FY2023, FPL divested $58 million of industrial property to Frasers Property Thailand Industrial Freehold & Leasehold REIT. FPL divested $228 million of assets in Australia — including an industrial property and Frasers Place, Melbourne — to third parties.
“FPL is seeking to increase its residential exposure and explore redevelopment opportunities, which we anticipate could help unlock value from FPL’s balance sheet. We also see greater prospects for divestment opportunities following the revaluation of FPL’s industrial & logistics portfolio. Furthermore, FPL’s decision to raise dividend payout places greater emphasis on shareholder returns,” says JP Morgan in a post-FY2023 results report in November 2023.
“Our investment properties have provided the group with a stable earnings base, while our development exposure has boosted our returns. Given where we are with interest rates and in line with our focus on improving the group’s returns, we will continue to leverage the group’s capabilities to increase our development exposure, which we believe can give us better risk-adjusted returns,” FPL’s management said in its Jan 18 replies.
The NEX step
On Jan 25, Frasers Centrepoint Trust J69U , which already holds an effective stake of 25.5% in NEX, said it would acquire FPL’s 24.5% stake in NEX for $523.1 million, giving it a 50% stake. In February 2023, FPL and FCT, of which FPL holds 41.47%, acquired a 50% stake in NEX together based on a valuation of $2.077 billion.
The rationale for the divestment is part of its active portfolio management, which “enables the group to both optimise capital productivity and support the growth of its REITs”. The company intends to use the net proceeds for working capital, including servicing and repaying borrowings.
JP Morgan notes that FPL has increased its residential exposure with a 25% stake in a Lorong Toa Payoh government land sale along with City Developments (CDL) and Sekisui House to recycle capital faster.
FPL could also redevelop its existing properties to “unlock value from its $19.1 billion of non-REIT property assets”, JP Morgan adds. This includes the redevelopment of Bedok Point (which was acquired from FCT) into Sky Eden and the redevelopment of Central Place Sydney.
“We believe this may also point to two potential Singapore redevelopment projects for Robertson Walk (414 apartments and 164 serviced apartments), and for Valley Point and Frasers Suites Singapore (622 apartments and serviced apartments),” the JP Morgan report says.
“There is significant embedded value in many of these assets that can potentially be unlocked in time to come,” FPL’s management confirms in the Jan 18 answer, alluding to the $19.1 billion portfolio.
In a Jan 18 reply to shareholders, FPL reiterated that owning its investment properties through “capital efficient structures continues to be a key focus area, be it on the balance sheet, through listed REITs or private capital partnerships”.
Investors await a more capital-efficient balance sheet, higher dividends and rising TSR.
