Frasers Property should go private to address its depressed stock

AFTER taking Frasers Hospitality Trust (FHT) private, Frasers Property (FPL) should perhaps look into organising a privatisation deal for itself.

Much like FHT, the property group has performed poorly and struggled to garner a decent market valuation. Shares in FPL closed at S$1.05 on Friday (Aug 26), which is a 58.5 per cent discount to the group’s book value as at Mar 31 of S$2.53 per share.

FPL also happens to be 87.1 per cent-owned by corporate entities linked to Charoen Sirivadhanabhakdi. The 504.9 million FPL shares not already owned by his corporate vehicles currently have a market value of less than S$530.2 million.

At FPL’s book value, these shares would be worth about S$1.28 billion.

To put this in context, the Thai billionaire’s corporate vehicles injected more than S$1.11 billion into FPL last year in a poorly received rights issue.

As a privately held group, FPL might have more flexibility to reorganise itself and tap debt and equity capital providers to fund its growth ambitions.

Interestingly, FPL said this past week that it had formed Frasers Property Capital (FPC) – a unit that will “coordinate capital partnerships with like-minded investors keen to take part in the company’s growth”.

Real estate investment management veteran Wong Ping has been appointed chief investment officer of FPC. Wong previously held senior positions at CBRE Investment Management and Allianz Real Estate Asia Pacific.

A great deal depends on the attitude of FPL’s board and controlling shareholders, of course. Yet, the gumption that the board of FHT’s manager has displayed in addressing the poor market valuation of its stapled securities is something FPL’s own board should emulate.

FHT’s privatisation

The way FHT’s manager tells it, the proposal for the trust to go private arose from a strategic review by its independent directors (IDs) to unlock value for investors – which was announced on Apr 8.

FHT has grown its portfolio over the years through acquisitions and asset enhancement initiatives, and it now owns 14 assets across 9 cities in Asia, Australia and Europe valued at some S$2 billion.

Yet, its net asset value (NAV) and distributions per stapled security (DPS) have been declining. This has been attributed to weak growth in the hospitality sector in markets where FHT operates, as well as the strengthening Singapore dollar.

In the course of the strategic review, FPL had indicated to the IDs of FHT’s manager that hospitality remained a core business for the group and that FPL was prepared to consider a privatisation of FHT.

On Jun 13, the proposal for FHT to be taken private was announced. Under the deal, a unit of FPL will acquire all of FHT’s stapled securities other than those already owned by FPL and TCC Group Investments at S$0.70 each – which is equivalent to 1.07 times FHT’s book value.

Over the 5-year period until Apr 7, FHT had traded at an average discount to NAV of 19 per cent. Over a shorter 3-year period, FHT traded at an even bigger discount to NAV of 25 per cent.

TCC Group Investments holds more than 707.3 million (or 36.7 per cent) of FHT’s total outstanding 1.9 billion stapled securities. FPL holds almost 497 million (or 25.8 per cent) of FHT’s stapled securities.

Under the privatisation deal, FPL would be acquiring nearly 721.8 million FHT stapled securities for S$505.3 million.

Holders of FHT’s stapled securities will vote on the proposed deal on Sep 12.

Waning profitability

The parallels between FPL and FHT are obvious.

FPL has interests in more than S$42 billion of real estate assets at home and abroad, spanning residential developments, commercial buildings and business parks, shopping malls, industrial and logistics assets, and hospitality properties.

Yet, FPL shares have been steadily sliding against the backdrop of waning profitability and reduced dividends.

FPL’s return on equity (ROE) before fair value changes and exceptional items was just 2 per cent in FY2020, and 4 per cent in FY2021. (FPL has a Sep 30 year end).

FPL generated ROE of 6.1 per cent and 5.5 per cent back in FY2017 and FY2018, respectively,

Dividends of S$0.015 per share and S$0.02 per share were paid for FY2020 and FY2021, respectively. Dividends back in FY2017 and FY2018 came in at S$0.086.

Meanwhile, the group’s NAV per share has drifted sideways over the past 5 years.

Poorly received rights

With FPL shares trading at a steep discount to NAV, the group has struggled to raise money for growth.

In February 2021, FPL proposed a renounceable 37-for-100 rights issue of nearly 1.1 billion new shares priced at S$1.18 each.

Of the S$1.28 billion that was to have been raised, FPL planned to use S$700 million to expand its portfolio of industrial, logistics and business park assets.

A further S$250 million was earmarked for the establishment of private funds and joint ventures to invest in real estate assets.

The remaining S$330 million was for general corporate purposes and other strategic investments.

Despite the rights shares being priced at a 47.5 per cent discount to FPL’s NAV per share as at Dec 31, 2020, the take-up was very poor.

Valid acceptances and excess applications were received for only 982.9 million rights shares – or 90.6 per cent of total rights shares available.

This included the 940.2 million rights shares taken up by FPL’s controlling shareholders TCC Assets and Thai Beverage.

TCC Assets and Thai Beverage hold about 87.1 per cent of FPL’s shares. Only 12.9 per cent (or some 504.9 million) FPL shares are held by minority investors.

While the formation of FPC to coordinate capital partnerships could negate the need for further equity issues by FPL, it might not address the undervaluation of FPL’s shares.

Even CapitaLand - which had a formidable asset securitisation platform – once stubbornly traded at a deep discount to its book value.

This was eventually addressed by a major restructuring last year, which saw its property development businesses being taken private by its controlling shareholder while its real estate investment management activities and lodging business remained in the public market under an entity called CapitaLand Investment.

Shares in CapitaLand Investment closed Friday at S$3.77, or a 25.7 premium to its book value as at Jun 30 of S$3.00 per share.

Perhaps the time has come for FPL to take a leaf from FHT and begin negotiating with its controlling shareholders to go private at a fair price.