Analysts are positive on Frasers Logistics Commercial Trust (FLCT) as they expect potentially higher capital distribution from the Cross Street Exchange (CSE) divestment to be helpful for FY2022.

For the 1HFY2022 ended March, FLCT’s revenue and adjusted net property income (NPI) grew 1.7% and 3.6% y-o-y to $235.7 million and $180.1 million respectively.

In addition, ​​FLCT’s overall portfolio rental reversions came in at 2.6% up in 2QFY2022 ended March, which can be split into 2.1% up for its logistics and industrial (L&I) portfolio, and 2.6% up for its commercial assets.

DBS Group Research analysts Dale Lai and Derek Tan have kept a “buy” rating on FLCT with a lowered target price of $1.75 from $1.85.

With the recent divestment of CSE, Lai and Tan observe that FLCT has a large cash balance of approximately $300 million that it can immediately deploy to fund an acquisition and drive further accretion to earnings.

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FLCT also currently has a gearing of 29.5% as at end March-- the lowest gearing amongst its peers and a debt headroom approximately $1.3 billion before gearing reaches 40%.

Moreover, since its merger with Frasers Commercial Trust (FCOT), the REIT has acquired more than $600 million worth of assets from its sponsor. Despite this, FLCT still has the largest right of first refusal (ROFR) pipeline, valued at more than $5.0 billion which could double its portfolio, providing an extremely positive visibility.

“We believe FLCT has the capacity to fund its next acquisition by cash and debt, especially with a large cash balance of approximately $300 million and ample debt headroom,” says the analysts. “As such, we have assumed an approximate $350 million acquisition at a yield of around 4.5% by the end of FY2022.”

In light of how FLCT has acquired more than $562 million worth of assets in FY2021, Lai and Tan believe that development and asset enhancement initiatives (AEI) projects will complement further acquisition plans in FY2022.

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In addition to the ongoing development of the three-hectare vacant plot at Connexion II, FLCT has also recently forward-funded a prime warehouse development in the UK.

“We understand that the REIT will continue to focus on acquiring assets with development opportunities, as well as fund other development projects,” writes the analysts.

The team at OCBC Investment Research has also kept its “buy” rating on FLCT with a lowered target price of $1.61 from $1.66.

FLCT’s distribution per unit (DPU) rose 1.3% y-o-y to 3.85 cents, which constituted 50.2% of the research team’s initial FY2022 forecast.

FLCT’s overall portfolio occupancy also inched up 0.2 percentage points (ppt) q-o-q to 96.1%, with its L&I portfolio remaining fully occupied and its commercial portfolio occupancy at 90.5%.

At present, FLCT’s aggregate leverage decreased by 1.2 ppt q-o-q to 33.1%. However, the research team estimates this to decline further to 29.5% post-divestment of CSE and repayment of $395 million of debt which encompass mostly floating rate borrowings.

As a result, this leaves it with debt headroom of $1.3 billion before reaching an aggregate leverage ratio of 40%.

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71.3% of FLCT’s borrowings are on fixed rates, and this would increase to 82.6% post-CSE divestment.

“We like FLCT for its inorganic growth opportunities given its reduced aggregate leverage ratio and sponsor pipeline,” says the research team.

However, the research team remains wary of the impact of the depreciation of Euro and British pound against the Singapore dollar.

“As FLCT has a policy of hedging its distributions on a rolling six-month basis, we do expect to see some negative y-o-y currency impact for its 2HFY2022 DPU,” they write.

The research team has also lowered their FY2022 and FY2023 DPU forecasts by 2.2% and 2.0% respectively.

Finally, CGS-CIMB Research analyst Lock Mun Yee has kept her “add” rating on FLCT with an unchanged target price of $1.56.

Lock observed that FLCT’s portfolio occupancy slipped h-o-h to 96.1% from 96.9%, dragged down by lower take up at Alexandra Technopark (ATP), Farnborough Business Park (FBP) and Blythe Valley Park (BVP), while its L&I portfolio remains fully occupied.

The analyst is also maintaining her FY2022-FY2024 DPU estimates, though she has not assumed any pre-emptive new acquisitions in the estimates.

As at 11.51am, units in FLCT are trading at 5 cents down or 3.45% lower at $1.40 at a FY2022 P/B ratio of 1.13x and dividend yield of 5.61%, according to CGS-CIMB’s estimates.

Analysts positive on FLCT upon completion of Cross Street Exchange divestment

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