Frasers Logistics Earnings: Results Miss on Currency Headwinds; Maintain Fair Value Estimate

Frasers Logistics and Industrial Trust’s BUOU, or FLCT’s, first-half fiscal 2023 (ending September) revenue and net property income declined by 11.7% and 14.0%, respectively, due to the divestment of Cross Street Exchange in March 2022 and foreign currency headwinds. These were slightly below our expectations, making up 47% and 46% of our full-year estimates for revenue and net property income, respectively. The miss is largely due to larger-than-expected foreign translation losses. We updated our model accordingly and our fiscal 2023 distribution per unit, or DPU, is lowered to SGD 0.0718, implying a dividend yield of 5.3% based on the last closing price of SGD 1.36. Our fair value estimate remains unchanged at SGD 1.24 per unit. Although we like the trust for its strong balance sheet and exposure to the robust Australian logistics and industrial market, we think the shares are unattractive currently and investors should wait for a better entry price.

The trust’s portfolio occupancy rate was unchanged in second-quarter fiscal 2023 at 95.9%, with its logistics and industrial portfolio being 100% occupied (including a lease at Connexion signed after March 31, 2023), while its commercial portfolio struggles at 89.8%. The trust also continues to register positive rental reversions of 3.6% for its logistics and industrial portfolio and 4.2% for its commercial portfolio. One of the trust’s top 10 tenants, Google, will be surrendering about 150,000 square feet of space at Alexandra Techno Park in February 2024. While management remains optimistic on the runway it has to re-let the space, we think that competition is strong given the upcoming completion of Labrador Tower in 2024. In addition, near-term demand also remains weak with more technology companies giving up space than expanding under the current market conditions. As such, we expect a void period of 6-9 months after the surrender of the Google space.