Frasers Hospitality Trust (FHT SP) - UOB Kay Hian 2016-09-22: Deepening Footprint Down Under

FRASERS HOSPITALITY TRUST ACV.SI

Frasers Hospitality Trust (FHT SP) - Deepening Footprint Down Under

We have retooled our model to factor in a heightened risk profile by increasing our required return assumption, in addition to reducing our DPU estimate, following the yield dilutive transaction.
Improving liquidity, deepening geographic diversification, a stronger balance sheet for future acquisitions and scope for further contributions from the acquisition underpin the transaction.

Despite the sharp cut in our target price to S$0.81 (from S$1.01), we continue to see value and maintain our BUY recommendation.

We have adjusted our model to factor in Frasers Hospitality Trust’s (FHT) recently announced 32 for 100 rights issue to raise S$266.3m (S$0.603 price) to finance the A$259m acquisition of Novotel Melbourne.

Management alluded to a free float target of S$700m, which represents a 30.4% increase from the post-rights issue free float of S$536.5m (S$431.2m before rights issue).
We reckon that this could be achieved in the form of private placements, owing to healthy investor demand for recent offerings by other REITs (AREIT’s placement in August which was over six times subscribed).
Should management reach its free float target, FHT could see its trading performance improve from the increased liquidity.

In our discussion, management has not ruled out a potential expansion of its Australian footprint, with Sydney and Melbourne still seen as attractive markets. We note that this transaction has lowered FHT’s exposure to the post Brexit UK market (from 19.4% of portfolio value to 17.3%), as well as the Singapore market (from 41.2% of portfolio to 36.8%).
Singapore saw luxury and mid-tier hotel RevPAR decline 0.9% and 0.1% yoy respectively in 7M16. In contrast, industry consultant CBRE has noted the vibrancy of the Australian hospitality market with hotel RevPAR forecasted to grow 3% p.a..
Australia now accounts for 28.5% of portfolio value (20% previously).

Following the rights issue, gearing is expected to reach 34.1% from 38.3% (as of 30 June). This implies debt headroom of about S$226m, assuming a comfortable gearing level of 40%.

Fresh from the recent refurbishment of Novotel Melbourne’s rooms and conference/meeting rooms, and taking its high occupancy of 90% into account, management has expressed confidence in potentially seeing an uplift in room rates.
We also note that average room rates at Novotel Melbourne, which is located in Melbourne’s CBD, are about 30% lower than that of five star hotels in the vicinity (Westin, Grand Hyatt), and a potential re-rating of the asset at a higher tier could narrow the disparity in rates.

While the transaction will result in a 14% increase in income available for distribution, it will result in a DPU yield dilution of 12% and NAV dilution of 9%. Though management has assured us that future acquisitions would likely be yield accretive, the potential for further dilutive fundraising cannot be ignored.
We have increased our required rate of return by 50bp to 8.5% (from 8%) to factor in the heightened risk profile.

We lower our FY16F DPU estimate by 3% and that for FY17 and FY18 by 12- 13%, after factoring in the dilution from the acquisition.

We have increased our required rate of return by 50bp to 8.5% to factor in the heightened risk profile in addition to reducing our DPU estimate.
We continue to see value in FHT and maintain BUY with a lower target of S$0.81 (previously S$1.01), based on DDM (required rate of return: 8.5%, terminal growth: 1.7%).

Derek Chang UOB Kay Hian | Vikrant Pandey UOB Kay Hian | http://research.uobkayhian.com/ 2016-09-22

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.81 Down 1.010