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Tuesday, October 10, 2017

Frasers Logistics & Industrial Trust - Why you can keep FLT in your pocket

Why you can keep FLT in your pocket
FLT’s ability to tap FCL's Australian development pipeline (via FPA), and a favourable Australian industrial market are two key investment merits for the REIT. This is especially as there is an increasingly low availability of prime assets in Australia, mopped by capital chasing core assets. This puts FLT at an advantage vs. the other S-REITs which are diversifying into Australia. Further, its maiden portfolio acquisition of seven properties (mix of completed and development assets) demonstrates strong sponsor commitment.
 
FLT could maintain A$150m-200m acquisition rate over FY18F-19F
Given FPA’s development pipeline of A$850m (based on completed value), we believe FLT could maintain an acquisition rate of A$150m-200m over the next two years. If we were to incorporate this, we would derive a DDM-based TP of S$1.23. Thinking longer term (>three years), as Australian property market peaks and contingent on market cycles, we cannot exclude the possibility that FLT could acquire European assets from Geneba Properties, FCL’s newly acquired European logistics and industrials platform.
 
Australian industrials in an up-cycle
Our desktop research found the Australian industrials remaining firmly in an up-cycle. We highlight some of the metrics tracked by Knight Frank which include vacancy, take-up and average letting up period. These metrics all point to an “up”. In summary, Sydney remains the strongest market, thanks to limited available space and strong economic activity. Melbourne is also benefiting from good demand and population growth. Brisbane remains challenging but the worst is likely over, in our view. 

Raising FY18F-19F DPU by 2.8-4.6%
We incorporate FLT’s first portfolio acquisition of seven properties (valued at A$169.3m or initial portfolio yield of 6.41%) as well as the accompanying equity fund raising (private placement of 78m new units at S$1.01/unit) into our earnings model. To reiterate, we view the portfolio acquisition positively given the quality characteristics (long WALE of 9.6 years, 100% take-up) as well as the evident sponsor commitment.
 
Maintain Add with higher TP of S$1.2
Along with our DPU upgrade and the rolling forward of our DDM valuation, our target price is raised from S$1.10 to S$1.20. We maintain our Add rating, projecting total returns of 17% for FY18F (upside of 10.3% + FY18F yield of 6.7%). FLT is due to report its 4QFY17 results before trading hours on 2 Nov 2017. Nearer-term re-rating catalysts could be portfolio cap rate compression. We believe FLT's operations would remain steady. Downside risk could be an unexpected downturn in Australian industrials.

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