Frasers Hospitality Trust - DBS Research 2017-07-31: Outpace The Rising Interest

Frasers Hospitality Trust - DBS Vickers 2017-07-31: Outpace The Rising Interest FRASERS HOSPITALITY TRUST ACV.SI

Frasers Hospitality Trust - Outpace The Rising Interest

  • FHT's 3Q17 DPU of 1.2374 Scts (+8% y-o-y) was below expectations.
  • Boost from recent acquisitions but Singapore operations lagging our original estimates.
  • Share price rally to continue on DPU recovery and attractive yield on offer.



Yield compression likely. 

  • We maintain our BUY call on Frasers Hospitality Trust (FHT) with a revised TP of S$0.83. 
  • FHT has a portfolio of quality hotels and a successful acquisition track record such as the purchase of Sofitel Sydney Wentworth but investor interest at times has been muted. 
  • While FHT’s share price has risen as we had anticipated on the back of an increase in free float post the recent rights issue, the rally is not over in our view as investor interest in FHT still remains high. 
  • FHT still offers an attractive 6.7% yield which is at a 100bps premium to other hospitality REITs with similar exposure with a lower gearing.


WHAT’S NEW


Australia in the driver’s seat 3Q17 DPU up 8% y-o-y

  • FHT reported 3Q17 DPU of 1.2374 Scts, which was up 8.1% y-o-y. This was below expectations due to lower profitability at its Singapore operations.
  • The growth in DPU was mainly driven by the acquisition of Novotel Melbourne on Collins as well as improved performance across FHT’s existing properties with the exception of Singapore.
  • This resulted in both revenue and net property income (NPI) jumping 22.6% and 8.5% respectively. Do note that margins were down y-o-y primarily due to the inclusion of Novotel Melbourne. As the Melbourne hotel is not master leased unlike the other properties, the NPI margin takes into account operating costs of the property.

Australian portfolio delivers again

  • The Australian operations had another strong quarter with 3Q17 NPI in SGD terms jumping 42% y-o-y primarily due to the acquisition of Novotel Melbourne and also a stronger AUD.
  • Despite refurbishment works at Novotel Rockford Darling Harbour, RevPAR for FHT’s Sydney Hotels rose 7.3% y-o-y. Novotel Melbourne itself delivered 2.5% y-o-y increase in RevPAR.
  • Similar to prior quarters, the Sydney and Melbourne properties benefited from a busy events calendar, with Sydney continuing to gain from the reopening of the International Convention Centre.

Singapore operations hit by higher operating costs

  • NPI for the Singapore operations was down 20%, primarily due to higher operating expenses at Intercontinental Singapore.
  • This was despite higher RevPAR at Intercontinental Singapore which benefited from the refurbishment completed last year. Meanwhile, RevPAR for Frasers Suites Singapore was flat, the property facing weak demand from the oil and gas as well as the banking sector.
  • Led by a boost from Intercontinental Singapore, overall Singapore portfolio RevPAR rose 4% to S$252, primarily due to occupancy rising to 87.1% from 81.1% in 3Q16. ADR remains under pressure given the oversupply situation in Singapore, dropping to S$290 from S$298.

UK profitability under pressure

  • NPI for the UK portfolio in SGD terms fell 8% y-o-y owing to a weaker GBP.
  • In addition, due to higher minimum wages, profitability was negatively impacted resulting in gross operating profit (GOP) in GBP only rising 0.4% despite gross operating revenue (GOR) jumping 5% on the back of a 6% increase in RevPAR.
  • Over the quarter, improved sentiment albeit off a low base following the terrorist attacks last year, resulted in higher demand. Consequently, ADR rose 4% to GBP119 with occupancy bouncing to 89.3% from 88.9% in 3Q16.

Steady contribution from Japan

  • 3Q17 NPI for FHT’s Japan operations in SGD terms increased a modest 1% y-o-y largely due to the impact of a weaker JPY versus SGD.
  • Nevertheless, ANA Crowne Plaza Kobe benefited from an improvement in banquet as well as food and beverage business. This was supplemented by a 3% uplift in RevPAR.

Malaysia turnaround continues

  • The Westin Kuala Lumpur continues its turnaround with NPI in SGD terms jumping 30% y-o-y. Underlying performance in MYR terms was also encouraging with GOR and GOP jumping 11% and 39% respectively.
  • The better performance was attributed to stronger transient and corporate demand as well as the renovation of a nearby competing hotel. This resulted in RevPAR increasing 11% to MYR374.

Balance sheet provides FHT with dry powder for acquisitions

  • Owing to currency movements over the quarter, gearing ticked up marginally to 34.1% from 33.4% at end 2Q17. In addition, NAV per staple security eased to 74.92 Scts from 76.82 Scts.
  • Nevertheless, with gearing at only 34%, FHT remains in a good position to pursue debt funded acquisitions.
  • FHT’s effective cost of debt was relatively stable at 2.5%, with 87.8% of borrowings on fixed rates.

Trimmed FY17-19F DPU

  • On account of the weaker than expected performance from the Singapore operations, with RevPAR at Intercontinental Singapore tracking below our original estimates, we lowered our FY17-19F DPU by 2-3%.
  • This leads us to cut our DCF-based TP to S$0.83 from S$0.85.

Overall outlook still positive

  • Despite costs pressures in Singapore and UK in the near term, FHT’s outlook remains bright.
  • This is largely due to its large exposure to Australia (38% of 3Q17 NPI) which benefits from a solid domestic economy, limited supply, and growth in international tourists.
  • In addition, while the expected uplift in Intercontinental Singapore post its refurbishment is delayed, the Singapore operations (20% of 3Q17 NPI) should benefit from a recovery in the overall market next year.


Maintain BUY with TP of S$0.83

  • With 11% capital upside and 6.7% yield, we maintain our BUY call with TP of S$0.83.
  • We continue to like FHT on the back of an expected recovery in DPU and attractive 6.7% yield, and the stock is still an under-appreciated gem in our view.


Where we differ – Healthy DPU profile. 

  • While consensus is expecting a lacklustre 1% CAGR in DPU between FY17 and FY19, we believe this understates the upside potential for FHT.
  • Our more bullish view of 5% CAGR is underpinned by expectations of a recovery in the Singapore hospitality market (4% y-o-y growth in revenue per available room (RevPAR)), which the market is sceptical about, as well as full year contributions from the recent acquisitions of Novotel Melbourne and Maritim Hotel Dresden, and continued growth at its Sydney properties given favourable demand and supply fundamentals.

Gearing up for opportunities. 

  • Post rights issue, FHT is now in a strong position to pursue acquisition opportunities as its gearing stands at 33-34%. 
  • DPU accretive acquisitions would be the next re-rating catalyst for FHT.


Valuation

  • After a weaker than expected 3Q17 results, we trimmed our DCF-based TP to S$0.83 from S$0.85.


Key Risks to Our View

  • FX volatility. A key risk to our positive outlook are significantly weaker currencies - AUD, MYR, JPY, GBP and EUR - as Australia, Malaysia, Japan, the UK, and Germany contributed c.80% of FHT’s 3Q17 net property income.




Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-07-31
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.830 Down 0.850



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