Frasers Hospitality Trust - DBS Research 2017-12-15: Zooming Higher

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FRASERS HOSPITALITY TRUST ACV.SI

Frasers Hospitality Trust - Zooming Higher

• Frasers Hospitality Trust (FHT)'s 4Q17 DPU of 1.2763 Scts (+7.2% y-o-y) ahead of expectations.
• Results boosted by purchase of Novotel Melbourne and better performance from Australia and Malaysia.
• Resumption of DPU growth next year underpinned by recovery in the Singapore hospitality market.

Yield compression likely. 

• We maintain our BUY call on Frasers Hospitality Trust (FHT) with a revised TP of S$0.89. FHT has a portfolio of quality hotels and a successful acquisition track record such as the purchase of Sofitel Sydney Wentworth.
• While FHT’s share price has risen as we had anticipated on the back of an increase in free float post the recent rights issue, the rally is not over, in our view, as investor interest in FHT still remains high. 
• FHT still offers an attractive 6.9% forward yield, which is at a 100bps premium to other hospitality REITs with similar exposure, with a lower gearing.

Where we differ –

Healthy DPU profile. 

• While consensus is expecting a lacklustre 1% CAGR in DPU between FY17 and FY19, we believe this understates the upside potential for FHT.
• Our more bullish view of 6% CAGR is underpinned by expectations of a recovery in the Singapore hospitality market (4% y-o-y growth in revenue per available room (RevPAR)), which the market is sceptical about, as well as full-year contributions from the recent acquisitions of Novotel Melbourne and Maritim Hotel Dresden, and continued growth at its Sydney properties, given favourable demand and supply fundamentals.

Gearing up for opportunities. 

• Post rights issue, Frasers Hospitality Trust (FHT) is now in a strong position to pursue acquisition opportunities as its gearing stands at 33-34%. DPU-accretive acquisitions would be the next re-rating catalyst for FHT.

Valuation

• After stronger-than-expected 4Q17 results and rolling forward our valuation to FY18, we have raised our DCF-based TP to S$0.89 from S$0.83.

Key Risks to Our View

• FX volatility. A key risk to our positive outlook are significantly weaker currencies - AUD, MYR, JPY, GBP, and EUR - as Australia, Malaysia, Japan, the UK, and Germany contributed c.80% of FHT’s 3Q17 net property income.

WHAT’S NEW - Completes FY17 on a high 

4Q17 DPU slightly ahead of expectations 

• Frasers Hospitality Trust (FHT) delivered a 4Q17 DPU of 1.2763 Scts. This was up 7.2% y-o-y and was slightly ahead of expectations.
• The strong end to the year was largely due to the contribution from the acquisition of Novotel Melbourne as well as improved performance from the portfolio in Australia and Malaysia. This also resulted in 3Q17 NPI jumping 9.8% y-o-y to S$31.5m.

Australian portfolio the star 

• The Australian properties (38% of 4Q17 NPI) remain the star in FHT’s portfolio. 4Q17 NPI jumped 39% y-oy mainly due to the acquisition of Novotel Melbourne as well as the c.4% y-o-y appreciation of the AUD versus SGD.
• These factors offset the impact of the refurbishment of Novotel Rockford Darling Harbour which dragged overall Australian RevPAR to A$196 (-4.9% y-o-y).
• Stripping out Novotel Rockford Darling Harbour, RevPAR for the Sydney and Melbourne properties remains strong, up 3.6% and 4.0% y-o-y, respectively.
• The Australian market continues to benefit from growth in tourist arrivals and the healthy Australian economy.

Singapore properties still soft 

• Contribution from FHT’s Singapore properties (22% of 4Q17 NPI) remains soft. 4Q17 NPI was down 3.3% yo-y due to lower banquet revenue at Intercontinental Singapore as well as continuous downward pressure on ADR at Frasers Suites Singapore on the back of heightened price competition.
• Nevertheless, on the back of higher RevPAR at Intercontinental Singapore (due to higher occupancies), overall Singapore 4Q17 RevPAR improved marginally to S$264 from S$263 in 4Q16.

Rebound in Malaysia 

• The recovery in Westin Kuala Lumpur continued into 4Q17 (7% of 4Q17 NPI). 4Q17 NPI increased by 9.8% y-o-y as the property benefited from stronger transient and corporate demand, which also resulted in 4Q17 RevPAR improving by 15.7% to MYR456. 
• The Westin hotel also gained from stronger F&B outlet and banquet revenue on the back of stronger consumer sentiment and an increase in corporate and social events.

UK profitability under pressure 

• The UK operations remain a laggard (18% of 4Q17 NPI), with 4Q17 NPI dropping NPI 5.9% y-o-y to S$5.7m largely due to the depreciation of the GBP.
• However, gross operating profit in GBP terms was up 0.5% as the increase in minimum wages offset the improvement in occupancy (+3 ppts to 92.1%) and ADR (+2.4% y-o-y to GBP127). The UK hotel market continues to benefit from an increase in international arrivals as the GBP remains weak.

Fall in earnings from Japan 

• 4Q17 NPI for FHT’s Japan operations fell 17.6% y-o-y to S$2.8m (9% of 4Q17 NPI). The decline was due to a combination of a weaker JPY versus SGD as well as lower revenues and profitability in JPY terms due to a drop in the number of weddings, which negatively impacted banquet revenue.
• However, room revenue was relatively stable, with RevPAR falling marginally to JPY11,563 from JPY11,590 in 4Q16.

Balance sheet provides FHT with dry powder for acquisitions 

• Owing to the 5.5% increase in same-store portfolio values over the quarter, gearing fell to 32.1% from 34.1% at end-3Q17. Valuations for the Singapore and UK properties were generally stable in their respective local currencies, with valuations for the properties in Australia, Japan, Malaysia, and Germany rising by 8- 27%, 10%, 5%, and 4%, respectively, on the back of improvement in earnings and some cap-rate compression.
• As a consequence of the uplift in values, NAV per stapled security also rose to 81.59 Scts from 74.92 Scts.
• FHT’s effective cost of debt inched up marginally to 2.6% from 2.5% at the end of 3Q17. Meanwhile, the proportion of fixed-rate debt dipped to 74.7% from 87.8% of borrowings on fixed rates.

Upward revision to FY18-19F DPU and TP raised to S$0.89 

• On the back of the stronger-than-expected 4Q17 results we lifted our FY18-19F DPU by 1-3%.
• We have also raised our DCF-based TP to S$0.89 from S$0.83 as we rolled forward our valuation to FY18.
• Our TP implies a P/Bk of 1.1x, which we believe is justified, given FHT’s strong DPU growth profile (6% two-year CAGR) and its key markets of Australia and Singapore are in an upturn.

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-12-15

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.890 Up 0.830