Frasers Hospitality Trust - UOB Kay Hian 2015-11-18: Post-results Feedback Session With Investors

Frasers Hospitality Trust - UOB Kay Hian 2015-11-18: Post-results Feedback Session With Investors FRASERS HOSPITALITY TRUST ACV.SI 

Frasers Hospitality Trust (FHT SP) Post-results Feedback Session 

  • With Investors Investor queries were centred on regional hospitality sector trends, diversification strategies, hedging policies, asset enhancements and acquisition catalysts. 
  • Intercontinental Singapore AEI could see a 15% room rate increase post AEI that is well on track for completion come Feb 16. 
  • The REIT manager remained unruffled by the recent newsflow surrounding Airbnb pointing to a non-overlapping clientele. Its diversification strategy has bore fruit with FHT topping IPO forecasts. 
  • We re-iterate BUY with an unchanged target price of S$0.97. 


WHAT’S NEW 

  • We recently hosted an investor luncheon with FHT’s management post its FY15 results. 
  • Investor queries were centred on regional hospitality sector trends, diversification strategies, hedging policies to manage the forex risks, asset enhancements and acquisition catalysts. 


STOCK IMPACT 


• Ongoing AEI at Intercontinental Singapore 

  • Ongoing AEI at Intercontinental Singapore (S$26m), which is well on track for completion come Feb 16, should see ADR increase by approximately 15% post completion. In addition to sprucing up existing rooms, the refurbishment also allowed for space optimisation, which would facilitate rebranding of rooms (eg single to junior suite). 
  • Management has identified Novotel Rockford Darling Harbour and ANA Crown Plaza Kobe as likely candidates for future enhancement works. 
  • We reckon Novotel Rockford could be next in line for refurbishment, come 2016, to coincide with the completed redevelopment works at the neighbouring Sydney Convention Center. 

• Weakness in Singapore and Malaysia propped up by growth in Japan, Australia and the UK. 

  • ANA Crowne Plaza Kobe beat IPO RevPAR estimates by 19.2% (NPI by 17%), as Japan saw a wave of international tourist arrivals in 8M15, increasing 49.1% yoy to reach over 12.9m visitors. Australia and the UK also beat NPI IPO estimates by 25% and 22% respectively. This was in spite of the ongoing AEI at Intercontinental Singapore which was temporarily disruptive (84 rooms taken out on average). Malaysia also witnessed dimmer performance, following aviation tragedies and weak corporate demand from the lacklustre oil and gas segment. 

• Forex risk merely a single facet in geographic diversification strategy. 

  • Investor queries also revolved around increased forex risks as FHT continues along the path of diversification. However management has stated that its diversification strategy encompasses factors such as asset quality and locations ie central locations in gateway cities. 
  • With Australia now comprising 20.9% of total portfolio value post completion of the Sofitel Sydney Wentworth acquisition, management seems inclined to shift their focus to key cities in Europe, namely Amsterdam, Barcelona, Cologne, Frankfurt and London. Birmingham and Manchester were also cited by management as promising avenues of growth. 

• Hedging policies. 

  • During its IPO last year, 50% of fixed foreign sourced rental income was hedged although the recent forex volatility saw that extended to 12 months. The variable component is typically 50% hedged with the lack of near-term visibility pertaining to variable rent as the chief reason. 
  • On the balance sheet side, management prefers to adopt natural hedging as much as possible going forward ie matching foreign currency-denominated loans to foreign assets. 

• Airbnb’s push on home leasing guidelines. 

  • This October saw Airbnb enter discussions with the URA on potential crystallisation on home leasing policies to ease home-sharing. 
  • Management noted that corporate demand makes up approximately 60% of total visitors, and leisure visitors at both Singapore properties tend to be less price sensitive. They did concede that Airbnb could bring about a paradigm shift in the hospitality scene although this is unlikely to take root in the short term. Reasons cited were security, concierge services and F&B outlets which private homes lack. 

• Domestic hospitality outlook. 

  • Queries were brought up with regard to the incoming supply of hotel rooms streaming in next year (3,899 rooms or 6.3% yoy increase), with approximately 31% in the luxury segment. 
  • Management pointed to the completion of the ongoing AEI at Intercontinental Singapore in Feb 16, confident in the appeal of the finished product, which may see room rates hike up by 15%, improving NPI. However, this would likely shape up over a period of 6-8 months post AEI as marketing strategies, such as the upgrading of competitor benchmarking taking shape. 


EARNINGS REVISION/RISK 

  • Key risks are: 
    1. current gearing at about 38.9% raises concerns with regard to equity-funded acquisitions, 
    2. negative forex movements, 
    3. negative impact on REITs from a potential rise in interest rates, and 
    4. sharp slowdown in global travel and tighter corporate travel budgets. 


VALUATION/RECOMMENDATION 

  • Maintain BUY with an unchanged target of S$0.97 based on two-stage dividend discount model (required rate of return: 8.2% and terminal growth rate: 1.6%). 


SHARE PRICE CATALYST 

  • Yield-accretive acquisitions.



Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-18
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.97 Same 0.97


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