Frasers Property pops on deal rumour

MINORITY shareholders of Frasers Property Ltd (FPL) offered lots of ideas during the company’s annual general meeting (AGM) last year about what could be done to increase its dividend rate and boost its share price.

One shareholder suggested that FPL monetise some of its assets in order to lower its gearing and reduce the perceived risk profile of the group, the AGM minutes indicated.

Another shareholder asked if FPL had considered separating its property management business from its capital-intensive property development activities.

FPL was also cautioned about investing further in Australia by a shareholder, on the view that returns might be suppressed by continued depreciation of the Australian dollar against the Singapore dollar.

At FPL’s upcoming AGM – scheduled for Jan 24 – the company’s minority shareholders are likely to be much more interested in hearing what ideas the company’s controlling shareholders might be considering to unlock value for themselves.

On Jan 10, The Wall Street Journal reported that FPL’s majority shareholders may sell the company or some of its assets as part of a strategic review. This seemed to spur trading interest in FPL’s exceedingly depressed shares.

The stock closed last Friday (Jan 12) at S$0.99, up nearly 8.8 per cent for the week.

FPL did not comment on the news reports nor its surging share price until the end of the week. After the market closed last Friday, it said that it was not aware of any discussions in relation to the proposed transactions.

Discount to NAV

Without any information on what FPL’s controlling shareholders might be planning, minority investors cannot know for sure if they stand to benefit in any way.

Yet, the mere hint that things are about to change at FPL could keep its shares on the radar of analysts and investors in the weeks ahead.

Even after the strong rally last week, FPL is trading 60.7 per cent below its net asset value (NAV) as at Sep 30, 2023 of S$2.52 per share.

This seems an unjustifiably low price-to-book valuation for a blue chip real estate group with S$34.2 billion worth of properties around the world, spanning residential developments, commercial buildings and business parks, shopping malls, industrial and logistics assets, and hospitality properties.

FPL said in its FY2023 results presentation that 89 per cent of its property assets as at Sep 30, 2023 were generating recurring income. The group also has a stable of real estate investment trusts and capital partnerships to help optimise its capital productivity.

One possible reason for FPL’s depressed market valuation is its limited public float. As at Nov 28, 2023, corporate entities linked to Thai billionaire Charoen Sirivadhanabhakdi held nearly 86.9 per cent of FPL’s almost 3.93 billion outstanding shares.

This poses the risk of minority shareholders being squeezed out one day by a lowball privatisation offer.

Sagging profitability, dividends

My own view is that FPL’s seemingly low market valuation is largely a reflection of its weak underlying profitability and reduced dividend in recent years.

For FY2023, the group reported an 81.3 per cent decline in earnings to S$173.1 million. Revenue increased 1.8 per cent to nearly S$3.95 billion, while profit before interest and taxes rose 5.1 per cent to S$1.31 billion.

The steep decline in earnings in FY2023 was mainly due to net fair value losses on FPL’s commercial properties in the United Kingdom, and its industrial and logistics properties in Australia and the European Union, as capitalisation rates increased.

FPL pointed out, however, that it had chalked up a cumulative net fair value gain of S$3 billion from FY2018 to FY2023. This was the result of its efforts to drive long-term value creation at its investment properties.

Still, FPL’s return on equity (ROE) before fair value adjustments in FY2023 was only 3 per cent. During the preceding four financial years – from FY2019 to FY2022 – FPL generated ROE before fair value adjustments of 2 to 4 per cent.

This was lower than FPL’s ROE during the four years before that. From FY2015 to FY2018, its ROE before fair value adjustments ranged between 5.5 per cent and 7.7 per cent.

Then, there is FPL’s dividend rate. While FPL’s total dividend of S$0.045 per share for FY2023 is higher than for each of the preceding three years, it is below the S$0.06 per share declared for FY2019 and the S$0.086 per share declared for FY2018 and FY2017.

Poorly received rights

FPL’s waning profitability and lower dividend rate are likely to have been as disappointing for its majority shareholders as its minority investors.

It is worth pointing out that Thai Beverage and TCC Assets – which are linked to Charoen – coughed up a total of S$1.11 billion in 2021 for their respective entitlements to a 37-for-100 rights issue of new FPL shares priced at S$1.18 each.

Despite the rights issue being priced at a 47.5 per cent discount to FPL’s book value, valid acceptances and excess applications were received for only 982.9 million rights shares – or 90.6 per cent of the total rights shares available.

This included the nearly 940.2 million rights shares taken up by Thai Beverage and TCC Assets.

FPL is now trading 16.1 per cent below its 2021 rights issue price.

Against the backdrop of more expensive borrowing costs, it is perhaps not surprising that the majority shareholders of FPL might now be looking for ways to quickly harvest value from the real estate group.

The big question is whether a deal – if at all there is one – will benefit minority investors too.

FPL’s independent directors should perhaps begin a dialogue with the key decision makers on this matter to ensure that minority investors are not left out in the cold.