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FPL’s 3QFY18 core PATMI of S$157m (-13% YoY) came in above estimates, due to faster-than-expected recognition of development profits in Singapore.

Net gearing improved 6%pts QoQ but remains high at 89% and suggests that more properties are likely to be injected into its listed S-REITs.

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On the residential front, volumes jumped 35% QoQ to 897 units.

The recurring-income segments posted a mixed performance this quarter, with Singapore office seeing negative reversions and Hospitality SBU posting a 2nd quarter of net loss but solid occupancies in its Singapore retail and Australia investment properties.

FPL has fallen 18.3% YTD, underperforming both Developers (-8.3%) and FSSTI (-2.2%) despite having a relatively benign exposure to the Singapore residential sector.

Valuations remain undemanding at RNAV discount of 41% and P/B of 0.69x, compared to average of 26% discount and 0.76x for developers.

FPL’s continued focus on recurring income (80/70% of AUM/earnings) is likely support its consistent DPS of 9 Scts (or 5+% yield), though its relatively high gearing could cap more acquisitions, hence we expect more asset divestments ahead, particularly its Australia offices and Singapore malls.

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3QFY18 reported PATMI rose 9% YoY to S$198m, mainly driven by revaluation gain of S$30m.

Excluding one-off items and perpetual interest expenses of S$9.6m, 3QFY18 core PATMI is estimated to have fallen 13% to S$157m.

This is largely due to 74% decline in Australia SBU (on significantly lower contributions from residential development), 18% decline in International SBU (on lower China resi contributions) and net loss of S$1.6m (2nd straight quarter in the red) in its Hospitality SBU (on weakness in Malmaison du Vin properties in UK and pre-opening expenses at Fraser Suites Dalian), which more than offset a 121% surge in Singapore SBU (on stronger development profits).

Net gearing improved 6%pts QoQ to 89%, while NAV/share of S$2.45 (+1% QoQ) implies P/B of 0.69x.

Selective in Singapore resi. Even before the early July 2018 cooling measures, FPL group was very selective in its Singapore land banking exercise. Only the Jiak Kim Street site (500 units), is expected to be launched in 1H19. The sell-through rates of existing projects are healthy at ~91%. In terms of overall residential, FPL has S$2.7bn in unrecognised revenue, mainly from Australia (70% of total).

Residential volumes increased 35% QoQ to 897 units, purely underpinned by Australia (+93% to 617 units) as both China and Singapore fell by a respective 30% and 10% to 100 units and 180 units.

In Singapore, planning for FPL’s 500-unit Jiak Kim site is in progress, with target launch date of 1H19.

The project is expected to be launched at S$2,600-2,700 psf post the cooling measures, which still implies decent PBT margin of 8-12% on breakeven of S$2,390 psf and land cost of S$1,733 psf. Unbilled resi sales remained healthy at S$2.7b.

Patchy performance in recurring-income segments. In Singapore, FPL’s office portfolio posted a 3rd straight quarter of negative reversion (-3.9%), while occupancy fell 1.6%pts QoQ to 71.2% due to rising vacancy at FCOT’s Alexandra Technopark.

Maiden contribution from Frasers Tower is expected in 4QFY18 as the property completed in May-18 with 80% pre-commitment, while retail reversion was strong at +4.5%.

In Australia, portfolio occupancy improved 1.2%pts QoQ to 98.6% with 1-2%pts rise in office/retail, but negative reversions were registered for both retail and industrial properties.

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Gearing marginally lower QOQ at 89.3%. This is due mainly to asset recycling of 21 properties in Germany and Netherlands worth S$984.4m to Frasers Logistics Trust (FLT SP, S$1.05, Not Rated). Management remains comfortable with gearing of 80-100%.