Frasers Centrepoint Ltd: The Highest Dividend Yielding Property Developer!

Within seven hours of its launch, all 531 units of Hundred Palms Residences, an executive condominium (EC) in Hougang, were snapped up by buyers. Singapore's residential property market has lost much of its lustre in recent years, with a slew of zealous cooling measures and a supply glut keeping it on a sustained downtrend, but if the buoyant demand for Hundred Palms Residences is anything to go by, it looks like the winds are finally changing – and property developers could stand to benefit! Amongst the 15 stocks that made the cut on our Income focus list, Frasers Centrepoint Ltd (SGX.TQ5) is the only company that has exposure to the Singapore property market. With an estimated dividend yield of 4.06% (as of 31 August 2017), it is certainly a viable addition to any dividend-oriented portfolio.

Diversified Exposure To Major Property Sectors And Geographical Markets

Frasers Centrepoint Ltd (FCL) is an integrated real estate company and is one of Singapore's leading property developers, with SGD 24.7 billion assets as of end-June 2017 that makes it the second largest developer by total assets. By way of comparison, Capitaland (SGX.C31) has the largest asset base of approximately SGD 45.6 billion, while City Developments (SGX.C09) and UOL Group (SGX.U14) trail behind FCL with total assets of SGD 19.4 billion and SGD 11.8 billion respectively. FCL was previously the property development arm of Fraser And Neave (SGX.F99), but was subsequently spun off in a separate listing on the mainboard of Singapore exchange. Charoen Sirivadhanabhakdi, the Thai billionaire who co-founded ThaiBev (SGX.Y92), retains an effective interest of 87.5% in FCL – 59.1% through TCC Assets and 28.4% through ThaiBev.

FCL has a diverse portfolio of assets across major real estate sectors, including residential, commercial and hospitality properties. As a vertically-integrated real estate company that provides a full range of services, from green-field property development, investment and leasing, to the management of properties, FCL derives its earnings from across the entire real estate value chain in different sectors. While the bulk of its assets are based in Singapore, FCL has been branching out into overseas markets over the years to reduce its reliance on the local property market (Chart 1). Its 53.4% exposure to overseas markets that include Australia, UK, China and Southeast Asia excluding Singapore, provides further stability through geographical diversification, given that different countries and regions can be at different stages of the property cycle.

Chart 1: Geographically Diverse Portfolio Of Property Assets

Recurring Income Base Provides Resilience And Stability

Besides having a diverse portfolio of property assets, FCL also has a strong recurring income base – mainly from property leasing and management activities – that provides further resilience and stability to its bottom line and cash flows, especially since development revenues are typically volatile. As of end-June 2017, an approximate 71.3% of FCL's total assets are recurring income assets (Chart 2), which includes its commercial and hospitality properties. Some of its notable commercial assets include The Centrepoint, Waterway Point and Alexandra Point. Its hospitality portfolio boasts over 15,000 serviced apartments and hotel rooms (including third-party assets managed by FCL) that span more than 80 cities. FCL also holds about a third of its assets through its four SGX-listed REITs: Frasers Centrepoint Trust (SGX.J69U), Frasers Commercial Trust (SGX.ND8U), Frasers Hospitality Trust (SGX.ACV) and Frasers Logistics & Industrial Trust (SGX.BUOU).

Chart 2: Steady Growth In Share Of Recurring Operating PBIT

FCL's share of recurring operating profit before interest and tax (PBIT) has also been on a steady rise over the years, from 31% in 2011 to the current 55% in the nine months through 2017. The completion of Northpoint City (retail mall conveniently located beside the Yishun MRT station) and Frasers Tower (Grade-A office tower near Tanjong Pagar MRT station), both scheduled for completion in 2018, will further strengthen FCL's recurring income base. Its hospitality unit also has a healthy pipeline of over 8,000 serviced apartments and hotel rooms, with another potential 1,585 units coming from its parent company TCC Group, over the next three years. By 2020, FCL's hospitality portfolio will consist mostly of managed properties (about 67.4% of its hospitality assets) that bring in steady streams of management income.

Manageable Leverage With Well-Staggered Debt Profile

While FCL's net debt-to-equity ratio of 70.5% (as of end-June 2017) does not stack up favourably against its peers such as Capitaland, City Developments and UOL Group, which have much lower net debt-to-equity ratios of 39.0%, 17.9% and 23.9% respectively, it is worth noting that FCL's current high leverage is due to its AUD 2.6 billion Australand acquisition back in 2014, following which its net debt-to-equity ratio shot up significantly (Chart 3). The company has since taken steps to improve its financial position, mainly using an asset recycling strategy through its REITs. The injection of SGD 1.7 billion assets for the initial public offering of Frasers Logistics and Industrial Trust (FLT) in 3Q 2016, for instance, allowed FCL to pay down SGD 894.2 in borrowings, leading to a marked improvement in its net debt-to-equity ratio.

Chart 3: Asset Recycling Strategy To Improve Financial Position

The company is expected to continue with its asset recycling strategy to improve its balance sheet position and free up capital for reinvestment into projects with higher returns. Based on its latest annual report (as of end-September 2016), FCL held about SGD 3.8 billion in completed commercial and hospitality properties, all of which are directly owned and can potentially be injected into its REITs. Northpoint City and Frasers Tower, both of which are still under development and have a combined book value of SGD 2.3 billion, can be also be monetised in the future when completed. Moreover, approximately 78.0% (as of end-June 2017) of FCL's interest costs are fixed in nature and given its well-staggered debt maturity profile (average debt maturity of 3.2 years), its refinancing risks are limited as well.

Future Growth Potential With Near-Term Catalysts

Following a series of macro-prudential cooling measures implemented since 2009, Singapore's once soaring property market looks to have stabilised. While prices of residential properties remain muted, demand has been picking up, with the 6,905 transactions in 2Q 2017 the highest since 2Q 2013 (Chart 4). Sales activities at FCL's showrooms were also brisk – the developer sold over 700 residential units over the past three quarters, including 440 units of the recently launched Seaside Residences. The management has also expressed optimism over the future prospects of Singapore's property market, and expects the strong sales momentum to continue.

Chart 4: Sales Volume of Private Residential Properties Picking Up

A further improvement in market sentiment – especially if the government eases its property cooling measures – will not only bode well for the approximately 660 unsold units in FCL's inventory (Table 1), but also act as a potential share price catalyst. The ability to replenish its Singapore land bank at reasonable prices will also provide further upside for FCL's share price. In addition, its unrecognised property development revenue of SGD 3.4 billion, most of which are from its Australian development projects, provides earnings visibility for the next 2 – 3 years.

Table 1: Singapore Projects Under Development

FCL is also looking to build up its presence in Thailand, where there are potential synergies with TCC Group and represents a future growth engine for the developer. FCL currently holds a 39.9% stake in Golden Land Property Development, which is engaged primarily in residential and commercial property development and management in Thailand, and has about SGD 1.2 billion in total assets. The company was acquired in 2015 and is part of the Charoen Sirivadhanabhakdi empire. FCL also acquired a 40.1% stake in TICON, a leading developer of industrial and logistics properties in Thailand. With these acquisitions, FCL now has exposure to a fast-growing real estate market in Thailand, with a foot in each of the major real estate sectors.

Undemanding Valuations Relative To Peers

The net asset value (NAV) can be a good starting point to gauge the intrinsic value of FCL as its underlying assets are mainly real estate properties that can be sold in the market. Theoretically, if the company is liquidated, investors should be able to get back assets equivalent in value to its NAV. At its closing price of SGD 2.07 (as of 31 August 2017), FCL traded at a discount to its NAV of SGD 2.36 (as of end-June 2017), an indication that the stock could potentially be undervalued.

Alternatively, investors can use valuation multiples, such as the price-to-earnings (PE) ratio, to gauge the value of FCL. A company with a low PE ratio relative to its peers may be an indication that it is undervalued. FCL is currently trading at a forward PE ratio of 12.2X that is lower than the peer average of 16.6X (Table 2). In comparison, its closest competitors, Capitaland, City Developments and UOL Group are all trading at higher forward PE ratios of 18.5X, 18.7X and 17.1X respectively. While FCL's share price has staged a strong rally since its inclusion on our Income focus list, its investment case remains intact given its undemanding valuations and the fact that FCL is currently the highest dividend yielding property developer in Singapore!

Table 2: Valuations Of Singapore's Major Property Developers

Long-Term Dividend Play, But Not Without Its Risks

While we believe FCL is a solid long-term dividend play, investors should also be aware of the risks involved. As FCL derives about 30% of its operating PBIT from Australia, its fortunes will certainly be affected to a certain extent by the outlook of the Australian property market. With the Reserve Bank of Australia looking to tighten the screws on mortgage lending to cool the country's overheated property market, the implementation of further property curbs will dampen investor demand for Australian properties. Investors, however, can take heart that any risks stemming from FCL's exposure to Australia's property market will be partially mitigated by its diversified portfolio of property assets and stable recurring income base. Its future growth potential and undemanding valuations are also further reasons why FCL fits into a diversified portfolio of dividend stocks!

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

The Research Team is part of iFAST Financial Pte Ltd.