SI Research: Frasers Property – Opportunity Surfaces On Weakened AUD

There is often much investment wisdom to be gleaned from seasoned investor Warren Buffett’s quotes for value investors to ponder over. For instance in a letter Buffett wrote to his shareholders in 2010, the Oracle of Omaha commented that, “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

Against the strengthening Greenback underpinned by repeated rate hikes, not only currencies from the emerging markets were badly hit but even those from the mature markets were not spared. Specifically, the currency in question here is the weakening Australian Dollar (AUD), which has affected companies running businesses in Australia as they reported less than desirable results after earnings were translated back into the reporting currencies. Among them, we find Frasers Property (FPL) to be of particular interest.

Depreciating Australian Dollar

Rich in natural resources, Australia is a major exporter of minerals in particular iron ores and coal. In recent years, as China’s economy slows coupled with declining commodity prices, Australia is not doing as well as before. In order to boost its economy, the Reserve Bank of Australia had on many occasions stated that the AUD was too strong and kept the cash rate at a record low of 1.5 percent for the second year in a row.

There is no doubt that the Federal Reserve is going to raise interest rates at least once more before the year ends, and perhaps for a couple more times in the next year. In theory, this would make the US a more lucrative place to invest in and hence hasten the fund flows away from Australia, leading to less demand for its currency.

Meanwhile, backed by a stronger economic growth, the Monetary Authority of Singapore has adopted a tightening stance in April this year by allowing the Singapore dollar (SGD) to rise gently within the slope of the policy band. It is widely believed that this trend is likely to stay during the review in October.

Against the SGD, AUD has again weakened below parity in August this year to AUD1.0150 for every SGD as at 17 September 2018. Over the span of less than one year, AUD has already depreciated by more than 9.9 percent falling to a 20-month low, and there are reasons to believe that it may continue to drop further in the coming months.

Significant Australian Exposure

FPL is a multi-national real estate company which owns and operates a diverse portfolio of properties comprising five asset classes – residential, retail, commercial, industrial and logistics as well as hospitality, and has footprint spanning over 80 cities across the globe. Although the group’s portfolio can be considered well-diversified geographically, Australia is still a major market FPL has significant exposure in contributing approximately 35 percent to the group’s profit before interest and taxation in FY17. This was followed by the Singapore market which accounted for 33 percent and China at 15 percent.

Source: Company’s Annual Reports

Over the course in the last six years, FPL has made notable progress by more than doubling its portfolio of assets from $10.4 billion in FY12 to $27 billion as at 30 September 2017, translating into a compounded annual growth rate (CAGR) of 21.1 percent per annum.

Furthermore in terms of financial performances, revenue and attributable profit (before fair value change and exceptional items) in the last five years have also grown remarkably at a CAGR of 24.5 percent and five percent respectively.

Source: Company’s Annual Reports

Enhanced Portfolio Resilience

FPL’s 9M18 net profit slid 17.3 percent on the back of a 4.3 percent decline in revenue. The group attributed that to the earnings lumpiness that is inherent in the property sector caused by the timing of development income. Nevertheless we see this as less of a concern going forward as FPL has already taken steps to mitigate the impact of earnings volatility through diversifying its income sources geographically as well as strengthening its recurring income base.

In FY12, FPL’s assets in Singapore used to account for around 66 percent of its total assets but the group’s portfolio has since been reshaped such that total assets outside of Singapore now make up over 55 percent of its portfolio in FY17 from under 40 percent five years ago.

Apart from the healthy rental and management fees FPL generated from its investment properties, the group is also the sponsor of four listed REITs listed on the Singapore Exchange (SGX) – namely Frasers Centrepoint Trust, Frasers Commercial Trust, Frasers Hospitality Trust as well as Frasers Logistics and Industrial Trust – which will continue to be important contributors to FPL’s recurring income base through fee income. Currently, FPL has more than 80 percent of its total assets in recurring income property segments.

Attractive Yield

FPL’s share price has fallen by more than 27.2 percent since January this year to $1.63 as at 17 September 2018. The group has been paying out $0.086 every year since its re-listing in 2014 which translates to an attractive dividend yield of 5.3 percent, putting it as the highest yield property developer among those that are listed on the SGX.

Analysts are expecting AUD to rebound back above parity against SGD when tensions of the ongoing US-China trade war ease. Should that happen, we believe that investors’ interest in FPL will return correspondingly. Together with the track record of growth the group has demonstrated over the years and the yield which it offers, FPL appears as a worthwhile candidate for investment which is simply too irresistible to ignore.