FLCT Earnings: Net Property Income Margins Miss on Weak Commercial Portfolio Occupancies

Frasers Logistics & Commercial Trust’s fiscal 2024 first-half net property income of SGD 159 million was slightly below our expectation, making up 46.9% of our full-year estimate. However, the impact on distributions per unit was offset by the distribution of SGD 13.5 million of divestment gains, and the trust’s DPU of SGD 0.0348 was in line with our expectation. The miss in the NPI was due to lower NPI margins for the commercial properties, where average occupancies remain under pressure, and higher nonrecoverable land tax for the Australian logistics and industrial properties. We cut our near-term NPI margin estimates but expect margins to recover by the end of our forecast period as the commercial assets’ occupancy rates should gradually recover. Our DPU forecasts remain broadly the same as we expect management to continue to top up its distribution with divestment gains to keep DPU relatively stable. As such, we keep our fair value estimate at SGD 1.14 per unit. Based on the current price, we think the trust is undervalued, trading at an attractive fiscal 2024 distribution yield of 7%. We think that the weakness in its commercial portfolio has been priced in, with a 24.6% decline in its unit price over the last 12 months. We like the trust for its portfolio of logistics and industrial properties that benefit from favorable supply/demand market dynamics and expect this segment, which makes up 71% of the portfolio, to drive the trust’s performance over the near to medium term.