• We expect Frasers Logistics & Commercial Trust to recognise gain in fair value of investment properties at S$483.6m for its 2HFY21 results due to cap rate compressions for its logistics properties in Australia and Europe. We expect NAV per unit to increase by S$0.13 or 12% to S$1.24 while aggregate leverage would be lowered by 2.3ppt to 34.1%. We estimate that debt headroom will increase S$244m or 20% to S$1,451m.
• Frasers Logistics & Commercial Trust's distribution yield is attractive at 5.2% for FY22. Maintain BUY.

Sizeable Sponsor Pipeline Supports Frasers Logistics & Commercial Trust's Future Growth

• Frasers Logistics & Commercial Trust (SGX:BUOU) has right of first refusal to acquire logistics properties with NLA of 2.0m sqm in the Asia Pacific region and Europe from sponsor Frasers Property (SGX:TQ5). The acquisition pipeline is valued at more than S$5b as of Jan 21. Frasers Property is also actively developing more logistics properties and the sponsor pipeline expands at a rate of about S$200m per year.
• We expect Frasers Logistics & Commercial Trust to pursue strategic acquisitions of logistics properties in Europe and business park properties in the UK. In particular, Frasers Logistics & Commercial Trust could leverage on low cost of €- denominated loans to finance acquisitions in Europe.

Value Creation Through Development

• Newly acquired Blythe Valley Park located near 18,000sqm of office space. Management is reviewing feasibility to redevelop the site into a last-mile e-commerce fulfilment centre instead given its proximity to Farnborough Airport and a high-density residential catchment.

Significant Appreciation of Capital Values in Australia and Europe

• According to CBRE, cap rates have compressed benchmark cap rate of 4.5%.
• Similarly, prime yields have hit a record low of 3.35% for Germany and 3.00% for the Netherlands.

Sizeable Revaluation Gains to be Recognised for Logistics Portfolio

• We expect cap rates for S$0.13 or 12% to S$1.24 as of Sep 21. We estimate that aggregate leverage would be lowered by 2.3ppt from 36.4% to 34.1% in 4QFY21. We estimate that debt headroom for acquisitions will also increase by S$244m or 20% to S$1,451m based on regulatory limit on aggregate leverage of 50%.

Growth in E-commerce Creates Demand for More Logistics Space

• Online retailers are heavy-duty users of logistics space. Online retail sales are supported by 3x the logistics space required for brick & mortar retail sales. On average, every US$1b of retail sales creates demand for 1m sf of logistics space. The US-China trade conflict and the COVID-19 pandemic have caused disruptions and exposed the vulnerabilities of lean just-in-time supply chains. It is estimated that the transition from just-in-time to just-in-case supply chains would increase inventories by 5-10%.

Frasers Logistics & Commercial Trust - Valuation & Recommendation

• We maintain our existing DPU trades at P/NAV of 1.33x compared to peers’ 1.53x.
• Share price catalysts
  • Continued growth and expansion by tapping on sponsor pipeline.
  • Compression of cap rates for logistics properties in Australia and Europe leading to sizeable uation gains.

Source: UOB Kay Hian Research - 19 Oct 2021