Analysts from CGS-CIMB Research, OCBC Investment Research, and UOB Kay Hian have maintained their “buy” and “add” calls on Frasers Logistics and Commercial Trust (FLCT), although OCBC and CGS-CIMB have lowered their target prices.

OCBC’s research team dropped their fair value of FLCT from $1.71 to $1.66, while CGS-CIMB’s Lock Mun Yee and Eing Kar Mei lowered their target prices from $1.62 to $1.56.

On the other hand, UOB Kay Hian Jonathan Koh maintained his target price at $1.79.

In a Feb 9 note, Koh believes that the trust is benefitting from embedded fixed annual rental escalation, with FLCT having completed 20 new and renewed leases for 69,274 sqm of space in 1QFY2022.

Rental escalation for logistics properties was negative at 10.2%, based on signing rent excluding step-ups divided by preceding terminating rents.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/brokers-calls/uob-kay-hian-positive-comfortdelgro-new-australian-contract?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>UOB Kay Hian positive on ComfortDelGro with new Australian contract</a>

He notes that based on the mid-point rent of the new and renewed leases, rental escalation is marginally negative at 1.5%.

“Market rents have not kept up with the compounding annual escalation of 3.1%, which resulted in the negative rental reversion, while rental escalation for commercial properties was positive at 4%,” Koh adds.

CGS-CIMB’s Lock and Eing cite management guidance that as the remaining leases at higher rents in its Australia portfolio roll-off, the impact on negative reversions should also moderate.

On the other hand, Koh says that FLCT has stability from its portfolio’s long weighted average lease expiry (WALE), having an overall weighted average lease expiry (WALE) by gross rental income of 4.7 years, with 5.3 years for its logistics & industrial properties and 4.1 years for commercial.

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='/capital/brokers-calls/phillipcap-raises-tp-del-monte-69-cents-38-earnings-growth?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>PhillipCap raises TP on Del Monte to 69 cents on 38% earnings growth</a>

Only six industrial leases and 38 commercial leases are up for renewal for the rest of FY2022, which represents 4.8% of gross rental income.

For its logistics properties overseas, Koh thinks there is a “positive outlook” for logistics properties in Australia, Germany and Netherlands.

In Australia, vacancy rates remain tight at 0.4% in Sydney, 1.3% in Melbourne and 2.3% in Brisbane as of Dec 2021.

As such, rents for logistics space in Sydney, Melbourne and Brisbane increased 5.5%, 9.6% and 4.3% y-o-y respectively to A$153, A$103 and A$120 per sqm per year in 4QFY2021.

Meanwhile, rents in Germany and the Netherlands stand at €90 and €85 per sqm per year respectively, and there is upward pressure due to strong take-up and limited supply.

As for the other analysts, such as OCBC’s research team, they take note of the Trust’s dip in the overall occupancy, weighed down by its commercial portfolio.

Overall portfolio occupancy stood at 95.9%, a slight decline of 0.3% q-o-q. FLCT’s logistics properties maintained full occupancy, but its commercial portfolio registered a dip in occupancy from 91.8% as at Sep 30 2021 to 91%.

For more stories about where money flows, <a class='gtm_see_also_3_inread' style='text-decoration: underline;' href='/capital/singapore-economy/gst-hike-singapore-inevitably-needs-proceed-despite-inflation-kpmg?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>click here for Capital Section</a>

On Jan 22, FLCT also recently announced the sale of 2-24 Douglas Street, Port Melbourne for A$42.5 million and divestment of Cross Street Exchange (CSE) for S$810.8 million.

OCBC thinks that the CSE sale represents a “healthy premium” of 28.3% to the property’s book value of $632 million and an attractive exit yield of 2.5%.

FLCT expects to record a net divestment gain of $170.7 million after the completion of this sale.

They highlight that CSE had been struggling with its occupancy rate, standing at 83.6% as of Dec 31, 2021.

“Following this divestment, and assuming 49% of the divestment proceeds are used to repay its debt, FLCT’s aggregate leverage would decline from 34.3% in Dec 2021 to ~29.8%. Currently 71.6% of its debt is on fixed rates, and this is likely to increase as a portion of the divestment proceeds would be used to repay its floating debt.”

What this means, according to CGS-CIMBs Lock and Eing, is that FLCT is in a strong position to tap inorganic growth, including new acquisitions, particularly logistics/industrial assets in Germany and Australia.

“As the trust continues to evaluate new opportunities, management indicated it could provide some top-up from divestment gains during the income vacuum period,” they say.

However, with 71.6% of its debt in fixed rates, management indicated that for every 1 percentage point rise in average funding cost (currently 1.6% at end-1QFY2022), DPU could be affected by 2.4%.

Lock and Eing say they like FLCT’s visible inorganic growth potential and income resilience, and some potential re-rating catalysts: accretive new acquisitions.

On the other hand, some downside risks for FLCT would be an inability to make accretive purchases and a slow global macro outlook, the CGS-CIMB analysts say.

Units in FLCT closed on Feb 9 at $1.41, with a FY2022 price to book ratio of 1.1 and dividend yield of 5.5%, according to UOB KH.

Analysts maintain ‘buy’ calls on FLCT, with target prices starting from $1.56

Related Stories

Highlights

China's shock Covid shift adds fuel to world-beating stock rally

Related Stories

DFI Retail Group's net profit to fall 17% in FY2022: CGS-CIMB

FLCT acquires prime freehold logistics property in North West England, UK at an estimated cost of $175.9 mil

Indonesia 'clearly' did not benefit from palm oil export ban, prices correct 28% after lifting: UOBKH