• Divesting assets at a premium
• May look to acquire soon
• RBA cash rate at 1.25%

Unlocking value with divestments at premium to book values

Frasers Logistics & Industrial Trust (FLT) has been active on the capital recycling front in Australia, having announced the divestment of a couple of its properties over the past two months. This includes the divestment of the warehouse plus hardstand components and subsequently the office and deck car park components of its 610 Heatherton Road property in Victoria for a consideration of A$15.0m and A$5.4m, or a 11.1% and 20.0% premium to their apportioned book values, respectively.

Total net proceeds work out to be A$19.2m for this property. Another announced transaction was FLT’s divestment of a 50% stake in its property at 99 Sandstone Place, Queensland, for a sales consideration of A$134.2m. This represents a decent premium of 8.8% over the property’s book value of A$123.3m (based on 50% interest).

The property is currently leased to Coles Group, which is FLT’s single largest tenant at 7.0% of its gross rental income (GRI). Post-divestment, FLT’s portfolio tenant concentration risk would be reduced as Coles is expected to contribute 3.6% of overall GRI. The estimated net proceeds from this sale is ~A$128.8m, and we expect FLT to recycle this capital into new acquisitions in Australia and/or Europe.

RBA’s recent move a double-edged sword for FLT

In early Jun, the Reserve Bank of Australia (RBA) cut its target cash rate to a record low of 1.25% from 1.50%, in-line with economists’ expectations. The RBA cash rate had been maintained at the 1.50% level since Sep 2016 and this move reflects the sluggish macroeconomic outlook amid Sino-US trade tensions, slower inflation and signs of weakness emerging in Australia’s labour market.

Looking ahead, based on a recent Bloomberg survey, economists are expecting another 25 bps cut in Aug this year (median forecast), while the cash rate is expected to reach 0.75% in 1Q20. We believe a lower cash rate in Australia is a double-edged sword for FLT, which derived 67% of its portfolio value from Australia.

On one hand, it could drive local borrowing costs lower, thus facilitating a more favourable funding cost environment for FLT should it pursue further acquisitions in Australia. On the other hand, a lower cash rate puts pressure on the AUD which has stayed below 0.95 against the SGD (i.e. SGD per AUD) for the most part of Jun. We do not believe FLT has hedged a large part of its estimated distributable income from Australia. Our fair value is unchanged at S$1.20.

Source: OCBC Research - 28 Jun 2019