• Downgrade from Add to HOLD with Target Price of S$1.21 due to steep valuations and lack of visible positive re-rating catalysts.
• Strength in Frasers Logistics & Industrial Trust's share price has priced in the impact of index inclusion. We also expect the negative rental reversions to continue.
• Frasers Logistics & Industrial Trust's 2QFY19 DPU of 1.76 Scts was in line at 25% of our forecast driven by contributions from new acquisitions but offset by the weaker A$ and euro.

Downgrade From Add to HOLD With a DDM-based Target Price of S$1.21

• We downgrade FRASERS LOGISTICS & INDUSTRIAL TRUST (SGX:BUOU) due to steep valuations of 1.3x P/BV and 5.7% yield (historical averages of 1.1x and 6.8%, respectively). We think this has fully priced in the impact of index inclusion in Mar 19.
• Our forecasts are adjusted to include the impact of the divestment of South Park Drive, assuming the proceeds are used to pare down debt. We also lower our risk-free and terminal growth rates to account for the more dovish interest rate impact.
• De-rating catalysts are the further depreciation of the Australian dollar and euro vs. S$.
• Upside risk could come from stronger rental reversions and accretive acquisitions.

Index Inclusion a Positive But Fully Priced in

• In Mar 19, Frasers Logistics & Industrial Trust announced its inclusion in the FTSE EPRA/NAREIT Global Real Estate Index Series (Global Developed Index). While this could help to raise trading liquidity and visibility to investors, we think that the impact had been fully priced in.
• Since the announcement, Frasers Logistics & Industrial Trust has gained 6.3% while average trading volume has risen 40.5% compared to pre-announcement volumes in 2019.

Negative Rental Reversions Expected to Continue Despite AEIs

• Frasers Logistics & Industrial Trust reported -5.3% average rental reversions for 2QFY19 (-7.2% in 1QFY19), attributed to properties representing 1.3% of total Portfolio Gross Lettable Area. A significant portion was due to the lease extension of CHEP Australia which had a -4.9% reversion. This is despite Frasers Logistics & Industrial Trust currently undertaking the asset enhancement (AEI) of CHEP Australia to expand the existing hardstand area and upgrade the existing facilities.
• The negative rental reversion does not account for the additional income from the expanded area.
• Frasers Logistics & Industrial Trust has minimal expiries left in FY19 of 1.3% of gross rental income.

2QFY19 in Line Due to New Acquisitions and Weaker A$ and Euro

• Frasers Logistics & Industrial Trust's 2QFY19 DPU of 1.76 Scts (-2.8% y-o-y, -1.1% y-o-y) was in line at 25% of our FY19F forecast due to contributions from European, Australian and Dutch acquisitions but offset by higher finance costs at A$7.2m (+48.2% y-o-y) due to debt taken on to finance such acquisitions. There was also the impact of a weaker A$ and euro against the S$ as the 2QFY19 hedged rate decreased 9.2% y-o-y.
• For 1HFY19, Frasers Logistics & Industrial Trust's DPU of 3.54 Scts (-1.9% y-o-y) was also inline at 50% of our FY19 forecasts amid the weakening A$ and euro.

Source: CGS-CIMB Research - 30 Apr 2019