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.