Frasers Property (formerly: Frasers Cpt (FCL))

[donmihaihai]

Hi weijian,

Going forward, no doubt that higher borrowing costs and inflationary cost environment will be headwinds for FPL. But is it priced in by the market at 0.3x PB? They have increased their dividend payout this time round and its yield should be an attraction for bargain hunters out there.

0.3X PB look cheap. 
FPL shareholder equity attributable to shareholders of about $9.9B, so it is trading at about $3B valuation. 
FPL total assets about $39.8B and total equity about $18.2B. 

The above say 
-$1 from shareholder funded $4 assets. 
- $1 from shareholder plus NCI funded $2 assets

There are another $4B in JVs and associates, one can dig out the leverage there. 

All the above mean, FPL spread wide and far, with many layers(NCI, JV, associates) and leveraged. $3B($3B if one look at fund raising, $9.9B if fund raising is not needed) which is less than 10% of total assets might be on the hook for more to close out the gap from $9.9B to closer to $39,8B if a chain reaction from one of the weakest links in this empire break. 

Paying higher dividend payout at a time when money should be retained for safety might just mean trouble (upstream need money?) than being positive.

[ghchua]

Hi donmihaihai,

I think FPL's huge investment properties asset based on recurring income and recovering hospitality sector might have given them confidence to increase their dividend payout this time round. Aside from fair value losses, PBIT was actually 5.1% higher for full year.

If you look at FPL's asset profile, a major part is in investment properties, properties held for sale (i.e. under development) is much lower.

[donmihaihai]

Yes because of the stability of recurring income, FPL is able to use quite some leverage. Anyway, huge is relative and how much income from the investment properties support how much leverage and finally dividends. In my opinion, the structure of FPL is of concern which might be why FPL is holding on to quite some cash at FPL level and in the last 2 years, about $1B of that cash flow out so the squeeze is likely at FPL level.

BTW, dividend pay out of profit after interest and tax rather than before and FPL PAT exclude FV changes was at best relatively unchanged if not down. A rough calculation or just use operating cashflow before changes in working capital less interest and tax.

[ghchua]

Hi donmihaihai,

The cash flow out for last 2 years are mainly into investment properties and development projects, like the recent acquisition of interest in NEX mall and additional interest in Waterway Point which are one off big outlay. As those development projects complete and investment properties generate rental income, the cash will flow back in terms of operating cash flow and dividends/loan repayments from those structures like associates/JVs etc. They can also dispose assets to generate additional cash flow if these are not enough. For example, I believe that NEX mall could be offloaded to the REIT structure once they feel that it is time to do it. Also do note that because of the structure, the cash out flow might be on the underlying layers and not on FPL company itself if the accounts are consolidated.

Yes, dividend is paid out of net profit but FPL has more than enough past retained earnings to pay more than that. I am looking at PBIT because that is the operational profit, which determines whether FPL is doing well or not. If you use PAT exclude FV changes, you include non operational numbers like tax and interest expenses.

I hope that the above makes sense to you.

[donmihaihai]

Hi donmihaihai,

The cash flow out for last 2 years are mainly into investment properties and development projects, like the recent acquisition of interest in NEX mall and additional interest in Waterway Point which are one off big outlay. As those development projects complete and investment properties generate rental income, the cash will flow back in terms of operating cash flow and dividends/loan repayments from those structures like associates/JVs etc. They can also dispose assets to generate additional cash flow if these are not enough. For example, I believe that NEX mall could be offloaded to the REIT structure once they feel that it is time to do it. Also do note that because of the structure, the cash out flow might be on the underlying layers and not on FPL company itself if the accounts are consolidated.

Yes, dividend is paid out of net profit but FPL has more than enough past retained earnings to pay more than that. I am looking at PBIT because that is the operational profit, which determines whether FPL is doing well or not. If you use PAT  exclude FV changes, you include non operational numbers like tax and interest expenses.

I hope that the above makes sense to you.

Make sense for most parts on normal time except that REITs hold minimum cash, so the net cash outflow of $1B, wrong to use $1B earlier, has to be at FPL level( still yet to check but by logic it should be). What you wrote is basically what FPL has been doing for many years. 

FPL has never been tested through abnormal time with the current leveraged, stretched and layered structure. What will happen if FPL is walking into one? This is my point. 

I wrote this because I have benefited from your blog in recent months by zooming into your property stocks purchases when as they are down as a group. Save lot of time and bought some cigar butts. Left FPL out because I think it is far too risky than what the standard matrix tells us. My opinion of course.

[ghchua]

FPL has never been tested through abnormal time with the current leveraged, stretched and layered structure. What will happen if FPL is walking into one? This is my point. 

Indeed, crisis is a good test of a company's balance sheet strength. FPL had went through Covid-19 crisis, did a rights issue and cut dividends. In fact, the current dividend is still below pre-Covid levels. I hope that there will not be another one in the near future.

[donmihaihai]

FPL has never been tested through abnormal time with the current leveraged, stretched and layered structure. What will happen if FPL is walking into one? This is my point. 

Indeed, crisis is a good test of a company's balance sheet strength. FPL had went through Covid-19 crisis, did a rights issue and cut dividends. In fact, the current dividend is still below pre-Covid levels. I hope that there will not be another one in the near future.

For most businesses, covid 19 was not even close to a crisis and from my comment you can certainly take it as I view covid 19 wasn't one for FPL because rental did not stop flowing and buyers keep buying properties.

[weijian]

Hi weijian,

Going forward, no doubt that higher borrowing costs and inflationary cost environment will be headwinds for FPL. But is it priced in by the market at 0.3x PB? They have increased their dividend payout this time round and its yield should be an attraction for bargain hunters out there.

0.3X PB look cheap. 
FPL shareholder equity attributable to shareholders of about $9.9B, so it is trading at about $3B valuation. 
FPL total assets about $39.8B and total equity about $18.2B. 

The above say 
-$1 from shareholder funded $4 assets. 
- $1 from shareholder plus NCI funded $2 assets

There are another $4B in JVs and associates, one can dig out the leverage there. 

All the above mean, FPL spread wide and far, with many layers(NCI, JV, associates) and leveraged. $3B($3B if one look at fund raising, $9.9B if fund raising is not needed) which is less than 10% of total assets might be on the hook for more to close out the gap from $9.9B to closer to $39,8B if a chain reaction from one of the weakest links in this empire break. 

Paying higher dividend payout at a time when money should be retained for safety might just mean trouble (upstream need money?) than being positive.

0.3X PB attracted my attention to look into detail too. Unfortunately, the Thai Taipan is well skilled in the art of multi layered structures - to avoid ownership restrictions (eg. foreigners cannot own >50% of real estate in Thailand) and ultimate control via multiple minority stakes. There is also jointed ownership with related/3rd parties on many of their properties.

So i Just took the easy way is to see how Mr Market responded over the last few years to FPL's discount to NAV.

Back in FY18, when DPU was fixed 8.6cents
- NAV~2.56sgd
- Based on eyeball of share price, the discount was 0.8x of NAV

Now in FY23, when DPU recovered to 4.5cents (after avg of 2cents from FY20-22)
- NAV~2.56sgd
- Based on eyeball of share price, the discount was 0.3-0.4x of NAV

So....despite AR23 saying that there was net ~3bil FV gain from FY18-23, or 77cents per share, NAV has stayed constant. Why was that so? It is even more puzzling as FP does not pay out 100% of its earnings and has retained a substantial amount with the low amount of dividends paid during covid years (FY20-22).

There seems to be a few factors stagnating its NAV:

(1) First, the company had ~2billion on perpetuals. FPL has redeemed ~1.1bil perpetuals in last few years and that has flowed away from the BS. Normally when you repay debt, your NAV stays the same (since cash asset is balanced by the debt liability) but not so for perpetuals which are not accounted as borrowings on the BS.

(2) As >50% of its assets are out of Spore, it is inevitable that translation losses (~400mil) - recognized directly into equity but not on P/L - has been substantial in recent years.

(3) The above only adds up to ~1.5bil of "losses" from the BS. Finally, the most damaging item to NAV would have to be the "50% discount to NAV" rights issue in mid 2021. That diluted the equity by ~15% by buying new shares at 50% to NAV.

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I have seem a couple of deeply discounted asset-heavy companies having their market prices' discount to NAV widening over the years. But it was mainly because of an increasing NAV that was not followed by market price increase. In general, Mr Market did not appreciate the NAV increase because it didn't believe that value would be unlocked in the short/medium term. But FPL has a widening discount as its share price dropped with the stagnant NAV. Would the stagnant NAV had been the catalyst to the increasing discount? (in addition to the obvious reduction in DPU over the last few years)

[ghchua]

Hi weijian,

I think its a combination of various factors that resulted in the underperformance of FPL. Maybe previously at 0.8x NAV, the discount to NAV was not big enough as compared to other developers.

Stagnating NAV to me is not the main reason as at 0.8x NAV, the market is pricing in immediate liquidation or expecting decent NAV increase every year which is pretty difficult to achieve. Decreasing dividend payouts and rights issue are definitely factors that contributed but as I have mentioned, there are also other too.

If you reavalued the listed REITs at market prices and computed into FPL as RNAV, the discount is even greater at around 0.2x RNAV around November last year when I first replied your post. Since then, I think the discount had narrowed a bit and it will be interesting to see how it performs going forward. Upside in dividends and profitability are definitely catalysts for re-rating.

[weijian]

Hi ghchua,

I think RNAV is a very interesting thing. For FPL, it has a lot of joint ventures/associates. In general, joint ventures/associates are accounted for via "equity method of accounting" on the BS. For this method, the carrying value will be adjusted based on the share of P/L and dividends received. For example, when parent recognizes 3mil share of profits on a 30mil carrying value, 3will be added to 30mil and new carrying value = 33mil. And when it receives 3mil of dividends, the 33mil carrying value will be reduced to 30mil.

Imagine the parent records the associate at 30mil. Annually, parent recognizes 3mil share of profit and gets paid 3mil dividends as well. After 10years, the associate will still be recorded as 30mil on the parent's BS. But we all know that the associate is surely worth more as it has been asset light (paid out all earnings as dividends) and has a 10year profitable record that an acquirer may be more than happy to pay up for. So a profitable associate is probably always undervalued on the BS.

But what if the associate is loss making? The parent will have to write down its share of losses to the carrying value. If the associate has been making consecutive losses, there is a good chance the parent will write down more than its share of losses. And as BRC Asia has recently demonstrated, it is going to recognize a gain from its Maldive disposal, mainly because it had written down most of its value earlier. So a loss making associate is probably always undervalued on the BS if the Mgt is conservative.

RNAV (re-valued NAV) is only RNAV if it is (Realizable)NAV. Is the NAV on FPL's BS realizable for the OPMI? Has Chaoren shown more tendency to gather than divest (realize value) over the last 10 years? In AGM2021/2022, thanks to AGM QnA which is the norm now, I read that OPMI had asked about the possibility of a "Capitaland decoupling". For AGM2021, Chaoren Junior gave a vague answer (probably the team hadn't concluded its evaluation as the Capitaland decoupling was just announced then). However for AGM2022, Chaoren Junior gave a very definitive NO when the similar question was posted.