Frasers Hospitality Trust - Hospitable outlook
- Normalised 1Q17 DPU down 19% y-o-y due to recent rights issue but beats rights issue forecasts.
- Underlying NPI up 16% y-o-y due to acquisition of Novotel Melbourne and Maritim Hotel Dresden.
- Upside to DPU from deploying strong balance sheet with gearing only at 33.7%.
Enhance liquidity to boost investor interest.
- We maintain our BUY call on Frasers Hospitality Trust (FHT) with a TP of S$0.75.
- While FHT has a portfolio of quality of hotels in key gateway cities and has a successful acquisition track record such as the purchase of Sofitel Sydney Wentworth, investor interest at times has been muted.
- We believe the increased free float post the recent rights issue should help allay investor concerns about its trading liquidity, thereby compressing FHT’s yield over time.
- In the meantime, FHT offers an attractive 7.7% yield with earnings upside from acquisitions.
Gearing up for opportunities.
- While there is near-term dilution from its recent pre-emptive rights issue, FHT is now in a strong position to pursue acquisition opportunities as its gearing stands at 33-34%. These acquisitions could arise from third parties but also from the clear and visible pipeline from its sponsor (Frasers Centrepoint Limited) and strategic partner (TCC Group).
- FHT has first right of refusal (ROFR) over 17 hotels and serviced residences located across Asia, Australia and Europe.
Exposure to growing markets with near-term boost from recent acquisitions.
- Approximately 55% of FHT’s 1Q17 net property income (NPI) is sourced from the growing markets of Australia (40%) and Japan (15%). FHT’s Australian and Japanese properties over the medium term are beneficiaries of the growing number of foreign tourists.
- Beyond this, FHT should also benefit from the recent acquisitions of Maritim Hotel Dresden in Germany and Novotel Melbourne in Australia.
- We maintain our DCF-based TP at S$0.75.
- With 12% capital upside and 7.7% yield we reiterate our BUY call.
Key Risks to Our View: FX volatility
- A key risk to our positive outlook is a significantly weaker AUD, MYR, JPY, GBP and EUR as Australia, Malaysia, Japan, UK, and Germany contributed c.74% of FHT’s 2016 net property income.