SINGAPORE (Nov 19): Frasers Property Limited (FPL) recently reported that its earnings dropped 25.3% to $560.3 million, from $749.6 million a year ago. 

Revenue for the year also fell to $3.79 billion, 12.2% lower than $4.32 billion in FY18. The mainboard listed group’s strategic business units (SBUs) in Singapore and Australia registered declines of 49% and 5% respectively. 

But despite the dismal performance, market watchers remain bullish.

In a report filed on Monday, CGS-CIMB analyst Lock Mun Yee says they anticipate a modest showing from FPL’s Australian market moving forward. 

“The Australian residential market appears to be bottoming out and the group had continued restocking its residential and industrial land bank with the addition of 3,791 residential units in FY19,” she adds. 

Revenue also fell on the back of lower contributions from development projects in Singapore and Australia, offset by contributions from newly acquired PGIM Real Estate AsiaRetail Fund (PGIM ARF) and the consolidation of Golden Land Property Development Public Company.

Sales volume for the year fell to a low of 1,800 units, half that of the 3,700 units in the preceding year. All markets reported lower sales volumes - with Singapore, Australia and China posting y-o-y declines of 81%, 37% and 51% respectively. 

Earnings per share for the year fell to 15.84 cents from 23.03 cents a year ago. 

FPL proposed a final dividend of 3.6 cents, a sharp decline from the 6.2 cents last year. Including the interim dividend of 2.4 cents that had already been paid to shareholders, total distribution for the year came in at 6 cents per share, down from 8.6 cents per share in FY18. 

While Lock highlights how the group’s hospitality, Europe and rest of Asia segments outperformed with y-o-y improvements in profit, she expects the firm’s Singapore contributions to “remain subdued” in the near term. 

Australia a key determinant

DBS Group Research analysts note that FPL derives an estimated 30% of its profits from Australia, making it a key market for the group. DBS analyst Rachel Tan opines that this is unlikely to change as it moves forward. 

Come FY20, FPL could rely largely on Australia on the back of five major residential projects which, with the exception of one, are more than 95% sold. 

“On its commercial assets in Australia, Frasers Property is currently developing 8 new assets with a total saleable area of 185,200 sqm which are scheduled to be completed in 2H20,” says Tan in a Monday report, adding that six of these assets, which are mainly industrial properties, are expected to be retained on the group’s balance sheet.

Tan adds that the group also aims to launch some 2,000 units in FY20, a two-fold increase from the 980 units launched in FY19. It also plans to complete and settle 1,950 units in FY20, up from the 1,675 units last year. 

Higher recurring income, stable cash position

FPL is also poised to thrive on the rewards from its efforts to grow its recurring income base over the past few years. 

Tan says the group’s recurring income has increased to 75%, from 59% in FY18, adding that Frasers Property has made new investments after its strategy of active asset recycling into its REITs. These include the acquisition of PGIM ARF and the landbank acquisition of a mixed used development project in Xuhui, China. 

In particular, the group’s stake in PGIM ARF brings with it “potential synergies and efficiencies that could be derived from collaboration in managing the assets within the fund,” Tan adds. 

“Frasers Property’s managed REITs are actively looking to grow their AUMs and are trading at yields conducive for potential asset monetisation opportunities at an appropriate time”. 

Lock agrees, identifying the group’s active capital deployment strategy as a potential re-rating catalyst. 

Apart from stable sources of recurring income, Frasers Property is also experiencing an improved cash position, as net cash inflow following collections from settlement of development properties. 

Optimistic outlook

Although brokerages say the group’s share price might experience near-term weakness on the back of the weak results, lower dividends and higher gearing figures, they remain fairly certain that group can bounce back. 

In particular, Tan cites FPL’s remains firm in the group’s extraction of value from its recent investment in PGIM ARF, as well as its asset monetisation tactics that could lower its gearing in the medium-term. 

“Also, the latest draft URA Masterplan 2019 with an emphasis on the redevelopment of the CBD would continue to support high occupancy rates at FPL’s commercial properties in the CBD, and improve the sales momentum of Riviere,” says Tan. 

Lock, on the other hand, notes that while slow residential sales and one-offs were a drag on financial performance, these were partially offset by recurrent rental and fee income.

“Downside risks include slower value unlocking activities due to the weaker macro outlook,” says Lock. 

As such, both DBS and CGS-CIMB are maintaining their “buy” calls on FPL. DBS has lowered its target price to $2.05 from the previous $2.30, while CGS-CIMB has an unchanged target price of $2.08. 

As at 3.27pm, shares in Frasers Property Limited are trading flat at $1.70. This translates into a price-to-earnings (P/E) ratio of 11.0 times and a dividend yield of 3.1% for FY20F according to DBS valuations.