FRASERS PROPERTY


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With property companies in Singapore being hit by both the recent property cooling measures and the prospect of rising interest rates, many property companies listed here have fallen greatly from their January highs. I’ve began to take interest in property companies recently, as a number of them are trading close to their 52-week lows. Another proxy for our local residential property market would be APAC Realty, which has seen its share price performing poorly of late. As interest rates increases, home buyers face higher financing costs for their property, which may result in them scaling back on their purchases.

In July, when the latest property cooling measures were implemented, property developers here sold off sharply during the next few days. However, it would be important to note that many property companies here aren’t merely residential property developers – some have assets diversified geographically across numerous sectors. Hence, I believe that the recent selloff in property companies has been overdone, and bargains have started to surface.

A company that got me interested was Frasers Property (FPL), a company that operates across Singapore, Australia, Europe, Thailand and China. FPL’s 2017 annual report provides a breakdown of their assets geographically.

Source: FPL Annual Report 2017

Company Overview


Frasers Property has stakes in various REITs, including Frasers Commercial Trust, Frasers Centerpoint Trust, Frasers Logistics & Industrial Trust and Frasers Hospitality Trust. I feel that owing FPL would be a more diversified option rather than selecting the individual REITs.

Investors should note that only approximately 12% of FPL’s shares are held by the public. The remaining shares are held by TCC Assets Limited (59%) and InterBev Investment Limited (28%). This results in FPL shares being less liquid relative to other developers.

Why I like Frasers Property


High Percentage of Recurring Income


This factor is of high importance to me as property developers tend to have lumpy earnings – depending on when the development properties are completed. With a high percentage of recurring income, it gives the company a more predictable revenue stream, thus the company would be less affected by a slowdown in the property market. 67% of FPL’s PBIT are derived from recurring income sources (Figure 1), while 80% of FPL’s assets are generating recurring income. FPL’s recurring income base is derived from its fee income as a REIT manager, dividends received from it’s stake in the REITs, as well as from rental income from its investment properties. In the latest annual report, FPL’s management has stated that its strategy would be to continue to grow its recurring income base, while ensuring that its sources are diversified geographically. 

FPL’s 3Q 2018 presentation shows how FPL has managed to grow its recurring income base:

Source: FPL Results Presentation, Q3 2018


High Dividend Yield relative to other developers


FPL has been paying out a constant dividend of 8.6 cents for the past 4 years. Looking at their dividend payout ratio, I believe that it is reasonable to expect a similar rate of dividends going forward. When looking at whether the dividends are sustainable, I look at the dividends paid as a percentage of FPL’s net attributable income before fair value adjustments. The net attributable income to shareholders before fair value adjustments gives us a more accurate perspective of earnings, as it does not include revaluation gains on investment properties, which are non-cash gains and boosts earnings per share.

Here’s a table which compares FPL’s dividend payout against its net income attributable to shareholders before and after fair value adjustments.

AlpacaInvestments Estimates

From the table above, it is evident that FPL’s payout ratio is healthy, and we can reasonably expect FPL to maintain or even increase its dividends going forward.

Investment Risks


High Debt to Equity Ratio

A key concern for me would be FPL’s high net debt to equity ratio, which currently stands at 89.3%.  I also noticed that FPL’s net interest cover ratio declined from 10x for 9M 2017 to 4x for 9M 2018. This was due to the double whammy of falling earnings per share and higher interest expense following its increased borrowings to fund acquisitions, as well as the completions of investment properties. During construction of investment properties, interest on the borrowings funding these properties can be capitalised, which reduces overall interest expense. Once they are completed, the subsequent interest expense cannot be capitalised, increasing interest expense.  However, FPL noted that there is a timing difference between the completion of these properties and the revenue contributions from them. Hence, we should expect FPL’s interest cover ratio to show some improvements in the next quarter.

With interest rates expected to continue rising, this would increase FPL’s interest expense. When FPL refinances their debt, it would likely have to borrow at a higher rate. However, property companies tend to have higher debt to equity ratios due to the nature of their operations. 

As of 30 Jun 2018, FPL had a fixed debt percentage of 74.8%, with an average debt maturity of 3 years. Their average cost of debt stands at 3%. 

Geographical Exposure to Australia

FPL has significant exposure to Australia, with 26% of their assets based there. Australia’s residential property prices have fallen for 12 months straight, and FPL’s management has flagged out challenging market conditions in Sydney, Melbourne and Perth in their quarterly earnings report. In addtion to Australia’s recent political challenges, Australia has also been affected by the US-China trade war, as the Australian economy is heavily dependent on exports to China. Weakness in the Australian Dollar may affect FPL’s earnings going forward, although FPL has some currency hedges (e.g FLT hedges its Australian currency risk) in place to mitigate this.

Conclusion


With FPL’s exposure to the Singapore property market estimated to be approximately 5%, FPL’s exposure to the Singapore property market is significantly lower than most other developers. I believe that FPL may have been irrationally sold off together with most of the Singapore property developers, due to fears over further residential property cooling measures. Nonetheless, some risks remain, including rising interest rates and a weak Australian Dollar. Ultimately, I believe that FPL at a range of ~$1.50 is probably a good time for investors to consider.


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