DBS Group Research 2015-07-16: Frasers Hospitality Trust - EMERGING GLOBAL HOSPITALITY REIT. Maintain BUY.

SGinvestors.io

EMERGING GLOBAL HOSPITALITY REIT 

Diversified portfolio in key gateway cities. 

• We maintain our BUY call with TP of S$0.89 given FHT’s geographically diversified portfolio of hotels and serviced residences located in key gateway cities such as London, Singapore and Sydney. 
• This portfolio offers investors a mix of growth and income stability. 

Resilient core income base. 

• FHT’s resiliency is underpinned by the fixed rental component of its master lease agreements, which represents 43-47% of group NPI. 
• In addition, while other hospitality REITs are facing headwinds from a slowing Singapore market, FHT’s Singapore operations should be relatively stable through the timely refurbishment of Intercontinental Singapore and income support from its strategic partner. 

Exposure to growing markets. 

• Approximately 59% of FHT’s projected income is sourced from the growing markets of Australia, Japan and UK. 
• In fact, FHT's recent purchase of Sofitel Sydney Wentworth deepens its exposure to the Sydney hospitality market which registered a 4.2% increase in RevPAR over 2014. 
• In addition, FHT’s ANA Crowne Plaza in Kobe, taps the growing influx of international tourists into Japan which jumped 45% for 5M15. 
• Meanwhile, FHT’s UK portfolio which has outperformed IPO forecasts is leveraging on strong corporate demand. 

Valuation: 

• Imputing higher shares on issue. 
• We lowered our FY15-16F DPU by 3-4% after imputing 
  1. higher number of shares on issue after FHT raised S$150m at S$0.82 per share, slightly more than our earlier assumption of S$125m at S$0.88, and 
  2. lower long-term AUDSGD (1.0), SGDJPY (92) and SGDMYR (2.85) FX rates. 
• This also reduces our DCF-based TP to S$0.89 from S$0.96. 

Key Risks to Our View: 

• FX volatility and renovation of Intercontinental Singapore. 
• A key risk to our positive outlook is a significantly weaker AUD, MYR and JPY as Australia, Malaysia and Japan contributes c.40% of FHT’s NPI. 
• Nevertheless, this risk is minimised near term through FX hedges FHT has entered into. 
• In addition, a medium-term growth driver for FHT is the expected increase in RevPAR following the completion of renovations at Intercontinental Singapore. Should this not occur, there will be downside risk to our earnings estimates. 

Potential Catalyst: Delivery of IPO prospectus forecasts and uplift form renovations at Intercontinental Singapore. 

Where we differ: Below consensus after adjusting for dilution impact of higher shares on issue.
(Mervin SONG CFA, Derek TAN)

Source: http://www.dbsvickers.com/