FLCT Earnings: Trimming Valuation by 4% on Miss; Pivoting Into Data Centers Is a Positive Move

Frasers Logistics and Commercial Trust’s BUOU, or FLCT’s, fiscal-year 2023 (ending September) results were below our expectations with net property income, or NPI, coming in 6% below our estimate. The miss is largely attributed to currency headwinds and lower-than-expected NPI margins due to higher energy and utility expenses. The trust also took a bigger-than-expected write-down on the fair value of its investment properties, writing off SGD 359 million from its balance sheet. The largest decline came from its commercial portfolio that was down 8.8% year on year due to higher vacancy rates, cap rate expansion, and translation impact. Meanwhile, its logistics and industrial portfolio’s valuation was down 2.8% year on year, with cap rate expansion offset by strong rental growth of its Australian properties. While the fair value write-down is a noncash adjustment, we think it reflects a lower value that can be crystallized by the trust in the event of a divestment.

Our fair value estimate was reduced to SGD 1.14 from SGD 1.19 after rolling forward our model and updating our assumptions. We cut fiscal 2024, 2025, and 2026 distribution per unit, or DPU, forecast by 2.2%, 5.3% and 5.9% respectively after lowering our NPI margin assumptions and baking in a longer recovery runway for its U.K. business park assets. Based on its last closing price of SGD 1.08 per unit, the trust trades at a fiscal 2024 dividend yield of 6.4%. While we like the strategic goal of Anthea Lee Meng Hoon’s, the newly appointed CEO, of increasing the trust’s logistics and industrial exposure to 85% of its portfolio from the current 70% and exploring new markets and data centers as an asset class, we think the trust is fairly valued currently and we encourage investors to wait for a better entry price.