DBS reinstates 'buy' on Frasers Property, says 'immense value' overlooked by investors

DBS analysts have reduced their target price to $1.21 from $1.70 previously, pegged to a 60% discount to Frasers Property's RNAV.

DBS Group Research analysts have reinstated their “buy” call on Frasers Property, which they believe is trading at a “remarkably cheap valuation” despite improving fundamentals.

In their report dated Sept 14, Derek Tan and Rachel Tan have, however, reduced their target price to $1.21 from $1.70 previously. Their new target price is pegged to a 60% discount to its revised net asset value (RNAV) of $3.02.

Citing its “immense value”, the analysts point out that the group is trading at 0.3x price-to-book value (P/BV), anchored at a historical low and one of the lowest amongst developers in Singapore, which trade at an average of 0.6x P/BV.

At its current share price and with its stake in various REITs exceeding its market cap of $3.1 billion, excluding Frasers Property Thailand, the analysts say that the market is ascribing “zero value” for the group’s role as a sponsor.

They estimate that Frasers Property’s strategic stakes in its listed REITs, based on current share prices of Frasers Centrepoint Trust, Frasers Logistics and Commercial Trusts, Frasers Hospitality Trust, Frasers Property Thailand Industrial Freehold and Leasehold REIT and Golden Venture REIT are worth some $2.9 billion — close to the group’s market cap.

“The market is ignoring the value that Frasers Property brings as a sponsor of its listed REITs and its exposure to the fast-growing industrial and hospitality businesses, spanning Australia, Europe and parts of Asia,” say the analysts. “At this level, we believe investors are missing out on a great stock with potential to deliver strong returns in the medium term.”

They also expect the group’s earnings to rebound in FY2024, driven by higher revenue recognition from its development projects in Singapore, China and Australia, whose presales total around $2.9 billion, and steady returns from its industrial, logistics and commercial properties in Europe, the UK, Australia and Asean.

Dialling up project completions across its industrial and logistics portfolios and a robust outlook for its hospitality business are also likely to result in resilient portfolio returns for Frasers Property, add Tan and Tan.

The group’s active capital management strategy, through which it regularly recycles capital to its listed REITs in Singapore and Thailand, will also optimise its capital structure with a 0.7x debt-to-equity ratio (D/E) while realising gains. “We believe its listed REITs can benefit from having a visible inorganic pipeline,” say the analysts.

With a target price of $1.20, they emphasise that the group is trading at record low valuations leaving it “deeply undervalued” and an attractive privatisation candidate, with a possibility of upside to dividends with higher profitability in the coming years.

Key risks to their valuation include a global slowdown that could impact demand for residential homes from potential slowdown in leasing demand.

As at 2.24pm, shares in Frasers Property were trading 3 cents or 3.75% up at 83 cents.

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