Is Frasers Logistics and Industrial Trust IPO worth an investment to consider

The offer

Frasers Logistics and Industrial Trust (FLT) is seeking a SGX mainboard listing through an Initial Public Offer (IPO) of up to 521.75 million units at an offer price range of S$0.85 to S$0.89 per unit. The IPO offer is expected to open on June 10 and closes on June 16, with trading expected to be on June 21. The joint bookrunners and underwriters include DBS Bank Limited, Citibank, Morgan Stanley, OCBC, and UOB.

The take-up so far

Cornerstone investors, including fund management companies, such as Blackrock Funds, JF Asset Management, Lion Global Investors, Morgan Stanley Investment, Nikko Asset Management, and NTUC Income have subscribed 492.9 million units. Based on the minimum price of S$0.85 per unit, the main sponsor, Frasers Centrepoint Limited (FCL) will take up 320.66 million units or 22.5%, while TCC Assets Group owned by Thai tycoon,  Charoen Sirivadhanabhakdi will take up 94.12 million units, or 6.6% of the IPO offering.

The rest of the IPO offering comprising of 521.75 million units, or 36.6% of the 1.43 billion available units will be offered to the public and institutional investors.

The Trust Portfolio

The assets held under the trust comprise of 51 logistics-related properties located across Australia, including Perth (Western Austrlia), Brisbane (Queensland), Adelaide (South Australia), Melbourne (Victoria), and Sydney (New South Wales). The properties in the trust are also comprised of assets acquired when FCL bought Australand Property Group from CapitaLand Limited in 2014. An illustration of the geographical locations of the properties is as follows:

Source: Company reports
Source: Company reports

According to FLT’s prospectus, the 51 logistics properties also include two properties currently under development and fully committed leases from these two properties have been secured from prospective tenants. These two properties are located in Victoria and have been pre-committed to CEVA Logistics and Schenker.

There are also three call option properties which are expected to have an aggregate gross lettable area (GLA) of approximately 70,740 sqm and an appraised value of A$126.8 million (S$128.1 million) upon completion. FLT has the right to acquire the three properties upon completion at an agreed price of A$125.8 million (S$127.1 million), and fully committed leases have been secured from prospective tenants for the three call option properties.

A summary of the existing and enlarged portfolio (including the three call option properties) is as follows:

Source: Company reports
Source: Company reports

FLT’s tenant base in Australia

According to FLT’s prospectus, the IPO portfolio has 68 tenants and enjoys a high occupancy rate of 98.3%. It also has a well-diversified tenant base that operates across a broad range of sectors including consumer, logistics and manufacturing sectors. Coles, a reputable supermarket and department store operator in Australia and New Zealand is the current major tenant. Apart from Coles, no single tenant accounts for more than 5% of the adjusted gross rental income in the IPO portfolio.

The IPO portfolio include high quality tenants comprising of Australian and multinational corporations including Techtronic Industries, John Danks (a subsidiary of Woolworths Limited), DHL Global Forwarding, Unilever, Schenker, Mazda, Toshiba, Fisher & Paykel, BIC, Goodyear & Dunlop, and TNT.

A breakdown of the tenant base by adjusted gross rental income is as follows:

Source: Company reports
Source: Company reports

The Australian Economy and the Industrial Properties sector

According to an independent industrial property market research report done by JLL on behalf of FLT, the forecasters estimate that the real gross domestic product (GDP) growth for Australia will increase by 2.6% per annum (pa) in the five years to 2020, which is in line with the 10-year annual GDP growth rate of 2.7% pa. JLL also said that the Australian economy is transitioning away from economic growth driven by mining investment and engineering spending, towards growth driven by consumer spending, public investment and greater export volumes.

On the industrial properties sector, JLL noted that the transport and storage industry (including 3PLs or third-party logistics providers), manufacturing, retail trade, and wholesale trade sectors are the key occupiers of prime industrial property in Australia. The two major factors driving growth in the industrial properties sector in Australia include rising e-commerce activities and international retailers establishing operations in Australia. These two factors require quality goods handling and distribution systems to be successful and have been the source of growth of the 3PL segment in Australia.

How does the DPU and gearing ratio compare to peers

Source: Company reports
Source: Company reports

The above diagram shows the IPO portfolio forecasts, without taking into account the enlarged portfolio which consists of the three call option properties. Including the three call option properties, the forecasts for the enlarged portfolio is as follows:

Source: Company reports
Source: Company reports

With the inclusion of the three call option properties, the net property income (NPI) is expected to grow by 7.32% in FY2017 from the current IPO portfolio, assuming that the FLT exercises the three call options by October 1, 2016. The DPU yield is expected to increase from the 6.83% to 7.00% (maximum and minimum IPO price respectively) in FY 2016 to 7.02% to 7.20% in FY 2017.

As for gearing, FLT is expected to draw down an amount of A$420 million under the term loan facilities, and the five-year revolving credit facility of A$200 million (RCF), the aggregate leverage is 29% (based on the minimum offering price), assuming the average interest rate for FY 2016 and FY 2017 is approximately 3.4% pa for the Loan Facilities.

Comparing FLT’s DPU yield, and gearing ratios with its industrial property trust and Reits listed on SGX, the forecasted figures looked quite compelling for potential investment consideration. A list of the DPU yield and gearing ratios of its SGX peers is as follows:

Source: Company reports
Source: Company reports

Investment thesis

With the concentration of the assets in Australia for FLT’s IPO portfolio, along with the expected high DPU yields of 6.5% to 7.2% pa, and the potential growth of e-commerce industries driving logistics supply chains across the continent, we believe that FLT is worth looking into for potential long-term investment. Moreover, with the expected low interest environment in Australia where the consumer price index (CPI) growth remains below the 2% to 3% pa and is forecasted to remain within this band over the 2015 to 2020 period, there is more scope for further monetary policy easing by Reserve Bank of Australia (RBA), thus making Reit investment a yield enhancing investment to one’s portfolio.

In addition, with the expansion of the existing IPO portfolio in sight, and the substantial per-IPO take-up rate of around 34.6% (492.9 million units) of the 1.43 billion units available by the cornerstone investors, we believe that there is reasonable base for investor confidence in the IPO offering.

Disclaimer: I plan to subscribe for the units of Frasers Logistics and Industrial Trust (FLT) IPO Offer at the price range of S$0.85 to S$0.89 per unit.

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I am in my mid-to-late 40s, married, and am thankful for my wife for all the things she has done. We do not plan to have kids, but are blessed with the simple lifestyle that we truly cherished with each other. I used to be from the financial services industry, having spent 12 years of financial industry experience, including three years working as a research associate for a hedge fund company in Wall Street, US, with assets under management (AUM) close to US$400 million during its peak in 2008. I am currently working as a market analyst with a Singapore-based agrochemicals company. I have a deep interest in equities trading/research and analysis, data analytics, real estate, REITs, forex, and digital currencies. I don't consider myself as an avid writer, but I hope to learn as much possible. I am a Chartered Alternative Investment Analyst (CAIA) holder and passed his Level I Chartered Financial Analyst examinations. I hope to complete my CFA examinations within the next five years. I value all the feedback provided by fellow readers and bloggers. Please provide any feedback on the work I did. Thank you readers.