UOB Kay Hian's Jonathan Koh has reiterated his "buy" call for Frasers Logistics & Commercial Trust (FLCT) but with a lower target price of $1.33, from $1.44, to take into account higher taxes in Australia. Income foregone because of the time needed to find new tenants for some of its properties in Singapore and the UK had also been taken into account.
In his Jan 2 note, Koh says that absentee owner surcharge (AOS) levied by Australia's state of Victoria has been doubled in 2024 to 4% of the taxable value of land. The affected properties account for 16% of FLCT's gross revenue in its FY2024 ended Sept 2024.
The higher AOS rate has increased FLCT's land and property tax by $9 million and lowered its net property income by 2 percentage points in FY2024.
Assuming the AOS rate for Victoria remains at 4% in the current FY2025, FLCT's land and property tax for this financial year should not be "substantially higher".
FLCT, according to Koh, has guided that its cost of debt will be trending up as loans are refinanced and interest rate swaps are rolled over at higher interest rates in the current FY2025.
The REIT's management has maintained its cost of debt guidance at mid-3% by 4QFY2025.
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However, Koh points out that the negative impact of higher financing costs will be blunted by FLCT's relatively low aggregate leverage of 33%.
In his Jan 2 note, Koh has also addressed concerns arising from the recent changes in ownership structure affecting FLCT.
A share swap involving ThaiBev and TCC Assets that took effect last September has caused Charoen Sirivadhanabhakdi, head of the group of companies including FLCT's sponsor Frasers Property , to see his effective stake in FLCT rise to just below 10%.
To qualify as a so-called managed investment trust (MIT) under the Australian Taxation Administration Act, FLCT needs to ensure that no foreign resident individual owns 10% or more of its units outstanding for its subsidiary in Australia.
To maintain the MIT status, FCLT's sponsor Frasers Property needs to sell new FLCT units it received as management fees.
"Assuming 50% of management fees is paid through the issue of new units and the new units are sold in the market over 10 days, we estimate that the selling pressure would amount to only 9% of the average daily turnover, which could be comfortably absorbed," says Koh.
Putting these shareholding and taxation issues aside, Koh notes that FLCT continues to enjoy positive industry dynamics in Australia.
While rental growth has slowed, FLCT's logistics properties in Australia are "under-rented" by 30%, suggesting further room for higher revisions of rental rates.
Koh warns that in Singapore, FLCT will occupancy rate at Alexandra Technopark, one of its key commercial properties, trending down further after anchor tenant Google Asia Pacific vacated more space.
From 85.9% in 4QFY2024, the cccupancy rate at this property is seen to drop to 74% in the current 1QFY2025
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"FLCT is working on backfilling the remaining vacant space but competition from other business parks remains tough," says Koh.
Meanwhile, FLCT had on Nov 5 2024 completed the acquisition of 2 Tuas South Link 1 for$140.3 million, which is 2.5% below valuation.
This logistics property is sited two-minutes' drive from the Tuas Mega Port and its anchor tenants include Bollore and YCH.
This acquisition will bring FLCT’s Singapore exposure from 9.8% to 11.6% and will provide a net property income yield of 6.6%.
FLCT is funding this deal with debt costing 3.5% and will increase its aggregate leverage from 32.7% to 34.1%.
The acquisition will also be accretive to DPU by 1.7% on a pro-forma basis for 1HFY2024.
Taking into account the downtime from Alexandra Technopark and the higher tax in Australia, Koh has trimmed his DPU forecast for the current year FY2025 by 3% and 8% for the coming FY2026, leading to his lower target price of $1.33 from $1.44.
FLCT units changed hands at 88.5 cents as at 10.20 am, up 0.57%.
