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Frasers Centrepoint Expands Aussie Operations
Corporate Digest | 07 July 2014
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By: Shane Goh
Articles (99) Profile

Frasers Centrepoint (FC) has been in the news for the past couple of weeks due to two major reasons: The potential acquisition of Australand Property Group (APG) and the current offering of its hospitality arm through Frasers Hospitality Trust (FHT).

FC has its hands on the residential, commercial and hospitality property sector as a developer and an owner/operator in Singapore and overseas.

Apart from the upcoming listing of FHT, FC provides asset management services through its retail and commercial real estate investment trusts (REIT) – Frasers Centrepoint Trust and Frasers Commercial Trust.

FC’s listing was the result of a separation of Fraser and Neave’s (F&N) property business from its drinks entity.

FC commenced trading on the Singapore Exchange (SGX) on 9 January, 2014. It opened at $1.61 per share and closed the day at $1.485, down 7.8 percent. A stark contrast to its last traded price on 4 July, 2014 of $1.825, with FC up 22.9 percent from its close on 9 January, 2014.

Australian Expansion
FC has offered A$2.6 billion ($3.1 billion) for APG. APG owns residential and industrial landbank worth a gross development value of $8.8 billion and $2.1 billion respectively.

FC is not new in the Australia market. In 2000, the firm entered the residential development segment of the country. Presently, it has a development portfolio worth A$1.2 billion in Australia and New Zealand.

Upon a successful completion of the transaction, Australia will represent 43 percent of FC’s assets. In total, its overseas market will make up 57 percent of FC’s assets.

Importantly, on a pro forma basis based on FC’s FY13 performance, Australia’s contribution to FC’s operating profit will rise from $4 million to $200 million. The surge will increase FC’s operating income derived from Australia to 26 percent.

Additionally, the operating profit contributions from recurring income streams will rise from 33 percent before the transaction to 54 percent after the transaction is completed.

This will bode well for investors as it reduces the turnover volatility FC is exposed to due to its property development business segment.

However, the proposed acquisition is not a full bed of roses without thorns. FC’s net debt to total equity will increase substantially from 0.4 times to 1.1 times. This may prove to be a bane for the company in the event it’s unable to obtain a return above its interest expense or face higher interest rates if it needs to borrow more capital to pursue other ventures.

This may lead the firm to seek equity raising in order to bolster its capital to pay off its debt.

Unlocking Its Hospitality Assets
On 30 June, FC’s prospectus to list its hospitality business was released to the public. You can read more about the initial public offering here.

Frasers Suites Glasgow, UK. Source: Company

The initial portfolio comprises of six hotels and six service residences. These properties are located in Singapore, Australia, UK and Japan.

The distribution yield is about 7 percent with the top-up included, but drops to 6.5 percent if the top-up is deducted.

Assuming the over-allotment is not exercised, the sponsor and its associate will retain 65 percent. This provides an assurance to investors that both the management and shareholders’ interests are aligned.

Based on its offer price of $0.88 per unit, the market capitalisation would be around $1.1 billion. This means FC stands to pocket about $367.5 million from the sale.

The money will allow FC to undergo capital recycling and channel the proceeds towards other ventures, such as the proposed APG deal, while holding a controlling stake in its existing hospitality business.

Investment Merits

  • Established track record as a property developer and asset manager
  • Exposure to the Frasers family of REITs listed on the SGX
  • Potential rise in recurring income component
  • Geographical diversification with APG transaction

Investment Risks

  • Surge in debt level and interest expense
  • Potential equity raising if FC needs funds to pay down debt
  • May overpay for its investments: CapitaLand’s previous divestment of its 39.1 percent stake in APG valued the latter at $2.2 billion. FC’s offer price for APG translates to a 42.8 percent premium to CapitaLand’s disposal price.

SI Research Takeaway
There’s a saying in Singapore that properties located in prime districts are a sure-thing for investments due to the land scarcity faced by the nation. Even if Australia could be the next alluring place for property investments, but paying a 42.8 percent premium for the sake of diversification seems like a poor business choice.

I would like to think that the management of FC knows what they’re doing with such a move. While not a certainty, FC could look to dispose certain parts of APG to lower its debt level. I would watch their next step in order to better understand the plans FC has for APG.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.

Frasers Property  1.780 +0.010 +0.56%   
Business: Co operates as a real estate company. [FY18 Geographical] Australia (41.1%), Singapore (33.2%), Europe (14.1%), China (7.2%), others (4.4%).

Insight: May-19, 1H19 revenue grew 27% due to significant c... Read More
CapitaLand  3.580 -- --   
Business: Co develops, owns, and manages real estate properties. [FY18 Geographical] China (41.2%), S'pore (38.5%), Europe & others (18.6%), Vietnam & Others (1.7%).

Insight: Apr-19, 1Q19 revenue fell 23.8% while net profit d... Read More

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