UOB Kay Hian Research 2015-07-30: Sector Research - Singapore REITs - Frasers Hospitality Trust

Frasers Hospitality Trust (FHT SP/BUY/S$0.81/Target: S$1.02) 

• Results above expectations. 

  • Frasers Hospitality Trust (FHT) reported DPU of 1.56 S cents for 3QFY15, bringing the DPU for the period 14 Jul 2014 – 30 Jun 2015 to 5.90 S cents and exceeding the company’s expectations at IPO by 3.7%. 
  • The results are better than expected mainly due to lower owner’s expenses and interest costs than forecasted and better-than-expected contribution from the UK and Japan, offsetting the softer performances from Singapore and Malaysia properties. 

• Singapore tourist arrivals in May marked the first positive growth 

  • Singapore tourist arrivals in May marked the first positive growth in 16 months (up 1.1% yoy) as Chinese visitor arrivals showed signs of stabilisation. 
  • InterContinental Singapore’s (ICSG) held up its performance with high occupancy of 87% on available rooms despite its ongoing renovation. 
  • However Fraser Suites Singapore registered weaker performance vis-à-vis forecast, in line with the soft Singapore rental property market. 

• UK portfolio exceeded forecasts 

  • UK portfolio exceeded forecasts due to strong demand from corporate travel and the beginning of the peak travel season in June. 
  • Visits hit record levels from Jan to April, having exceeded 10m for the first time. 
  • Visitor arrivals are expected to get a boost from the government’s initiative on a new 5-point plan to boost tourism in the UK on top of the new visa refund scheme to generate additional visits from China to Britain. 

• Strong international arrivals 

  • Strong international arrivals in the leisure segment and recovery of its domestic economy are expected to continue to support ADR growth in Japan in 2015 according to Horwath HTL. 
  • With the weakening yen making it attractive for visitors, International tourist arrivals in May 15 increased 49.6% to reach over 1.64m. 
  • FHT recorded strong RevPAR growth of approximately 15% at the ANA Crowne Plaza Kobe in Japan. 

• Weak leisure and corporate tourism arrivals in Malaysia 

  • Weak leisure and corporate tourism arrivals in Malaysia continued to result in lacklustre performance of The Westin Kuala Lumpur following the three aviation tragedies, as well as the lacklusture oil and gas market. 
  • The KL hospitality landscape is expected to remain challenging with slower economic growth and lower corporate travel demand amidst increased competition with about 3,500 hotel rooms and 1,700 serviced residence units likely to enter the market from 2015 to 2018. 

• Management has received approval for the Sofitel acquisition on 24 Jun 15. 

  • We understand that the yield will likely be around 6%, similar to that of the recent Sydney Hilton Hotel purchase by Bright Ruby group for S$442m. 
  • This would translate to a hedged property yield of around 5% vs hedged trading yield of 6.8% (unhedged trading yield 7.1%) and is likely to see a 50%-50% debt:equity split to make the transaction leveraged yield accretive. 
  • The transactions extends FHT’s footprint in Australia from 11.3% to 22.4% by asset value. 
  • The outlook for Sydney is expected to be positive due to the weaker Australian dollar. 

• Maintain BUY with an unchanged target price S$1.02. 

  • Our valuation is based on a twostage DDM model (required rate of return: 8.1%; terminal growth rate: 2.0%). 
  • We expect a strong 2016 on the back of contributions from newly renovated assets and stable growth from its existing properties. 
  • The stock is offering attractive FY15F yield of 7.2%. 

(Vikrant Pandey; Derek Chang)

Source: http://research.uobkayhian.com/