Frasers Hospitality Trust - DBS Research 2017-05-02: Recovery Just Around The Corner

Frasers Hospitality Trust - DBS Vickers 2017-05-02: Recovery just around the corner FRASERS HOSPITALITY TRUST ACV.SI

Frasers Hospitality Trust - Recovery just around the corner

  • 2Q17 DPU of 1.2063 Scts (-4% y-o-y) in line with expectations.
  • Decline in DPU largely due to dilution from the recent rights issue.
  • Expect DPU to recover from FY18 on the back of past acquisitions and easing supply in Singapore.

As expected, another decline in DPU 

Rights issue remains a drag on performance

  • 2Q17 DPU of 1.2063 Scts was down 4% y-o-y. This was despite revenue and net property income (NPI) rising 43% and 30% y-o-y respectively on the back of the acquisition of Novotel Melbourne and Maritim Hotel Dresden as well as improved contributions from its hotels in Sydney, UK and Malaysia.
  • DPU continues to be impacted by the recent rights issue, which saw a 27% increase in the number of shares on issue.
  • Post 2Q17 results, FHT will pay 1H17 DPU of 2.5321 Scts (-12.5% y-o-y) which represents c.49% of our FY17F DPU and is in line with our expectations.

Strong Australian performance

  • 2Q17 NPI from FHT’s Australian portfolio (43% of 2Q17 NPI) rose 97% y-o-y primarily due to the acquisition of Novotel Melbourne and strength of the AUD.
  • Novotel Melbourne itself had a healthy quarter, with revenue per available room (RevPAR) up 4% y-o-y.
  • However, FHT’s Sydney properties had an even stronger quarter, with RevPAR rising 11% y-o-y. The properties there benefited from the reopening of the International Convention Centre in December 2016.
  • Overall, the average Australian portfolio’s RevPAR rose 4% y-o-y to A$231. Both average daily rate (ADR) and occupancy rates improved to A$248 and 93.2% from A$240 and 92.7% in 2Q16 respectively.

Improvement at Intercontinental boosted Singapore operations

  • NPI for the Singapore operations (21% of 2Q17 NPI) rose 3% y-o-y, largely on the back of improved occupancy at Intercontinental Singapore following the completion of renovations in 2Q16. The lower vacancy at Intercontinental contributed to overall portfolio occupancy rising from 83.9% in FY16 to 88.5% in 2Q17. This offset the impact from the heightened price competition in the market which resulted in the Singapore portfolio’s ADR dropping to S$292 from S$302 in 2Q16. Overall 2Q17 RevPAR rose 2% y-o-y to S$258.
  • Meanwhile, Frasers Suites Singapore, reported flat RevPAR, as weakness in the oil and gas as well as banking industries was offset by new accounts from the engineering, government and manufacturing industries.

Lower contribution from Japan and UK

  • Over 2Q17, FHT’s ANA Crowne Plaza suffered a 5% yo-y fall in RevPAR and lower room and banquet revenues. Despite ADR rising 2% y-o-y, the main culprit for lower room revenues was a drop in occupancy from 74.9% in 2Q16 to 70.1% in 2Q17.
  • This was largely due to a stronger JPY which impacted the quantum of international arrivals into the Kansai region, causing less spill-over traffic from Osaka. In addition, the property reported a decline in domestic guests as the strengthening JPY encouraged the local Japanese to travel overseas. Consequently, 2Q17 NPI from the Japan fell 35% y-o-y in SGD terms.
  • Earnings from the UK also fell 5% y-o-y mainly due to the depreciation of the GBP. However, underlying performance in GBP was healthy, with gross operating revenue and gross operating profit up 10% y-o-y respectively. Increase in both ADR and occupancy, resulted in 2Q17 RevPAR rising 11% y-o-y to GBP81.

Malaysia off a low base

  • The Malaysian operations had a stronger quarter, primarily off a low base. While ADR rose a modest 1% y-o-y, occupancy at the Westin KL jumped to 75.2% from 70.3% in the prior year. This lead to RevPAR increasing 8% y-o-y to MYR396.
  • Balance sheet ready for opportunistic acquisitions
  • Following the recent right issue (32 rights stapled securities for every 100 existing stapled securities), FHT’s gearing now stands at 33.4%.
  • Overall cost of debt and percentage of fixed rate debt remains stable at 2.6% and 87.8% respectively.
  • Due to the appreciation of various foreign currencies, NAV per unit rose marginally to S$0.768 from S$0.745 end 1Q17.

Various asset enhancement initiatives to be undertaken

  • FHT guided that it plans to undertake several renovations at its various properties. It plans to refurbish its ANA Crown Plaza property which has not undergone any major renovations since its opening.
  • FHT also intends to rebrand its Best Western Cromwell London property into an Ibis Styles property.
  • FY17 a transition before recovery in FY18
  • With the Singapore hospitality market expected to remain under pressure due to a large increase in new supply and the Japan operations likely to face weaker demand from a stronger JPY, we believe FY17 will remain a transition year for the group. Combined with the impact from the new shares on issue from the recent rights issue, we expect FHT to continue to report y-o-y declines in DPU in 2H17.
  • Nevertheless, FY18 will be a recovery year as the supply pressures in Singapore ease and FHT benefits from the full year contribution from the acquisition of the Novotel Melbourne and Maritim Hotel Dresden. In addition, the Sydney and Melbourne hospitality markets are expected to remain firm.
  • Additional upside for FY18 would also come from the deployment of its balance sheet capacity. FHT’s gearing only stands at 33%.

Raised FY17 and FY18F DPU by 1-3%

  • To account for the better than expected performance from Westin KL and stronger AUD (we now assume AUDSGD exchange rate of 1.04 from 1.0 previously), we raised our FY17 and FY18F by 1-3%.
  • We also lifted our DCF-based TP to S$0.85 from S$0.75 previously as we roll forward to FY18 based year.

Maintain BUY with TP of S$0.75

  • With 16% capital upside, attractive 7% yield and potentially 6 months away from a turnaround in FY18 DPU, we reiterated our BUY recommendation with a revised TP of S$0.85.

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | 2017-05-02
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.850 Up 0.750