Frasers Hospitality Trust - DBS Research 2018-04-27: One Of A Kind

Frasers Hospitality Trust - DBS Vickers 2018-04-27: One Of A Kind FRASERS HOSPITALITY TRUST ACV.SI

Frasers Hospitality Trust - One Of A Kind

  • Frasers Hospitality Trust (FHT)'s 1H18 DPU of 2.42 Scts (-4% y-o-y) below expectations. 
  • Softer domestic Australian corporate demand and weak Singapore serviced apartments a drag. 
  • InterContinental Singapore a highlight with steady improvement in RevPAR on the back of a pickup in the Singapore hotel market. 

Difficult to replicate portfolio.

  • We maintain our BUY call on Frasers Hospitality Trust (FHT) with a revised Target Price of S$0.83. 
  • While near term DPU is likely to be under pressure, we believe with FHT offering a high 6.6% yield, c.50-60bps premium above its hospitality peers, it deserves a relook by investors. This is especially as FHT has a portfolio of quality hotels in key gateway cities which are hard to replicate at FHT’s current trading yield.

Where we differ – Believers of an earnings recovery.

  • Year to date FY18 DPU has disappointed, falling 4% y-o-y in 1H18. 
  • However, compared to consensus we are more bullish on the potential recovery in FY19 as we expect the recovery in the Singapore hotel market to gather steam in 6 months’ time, earnings for the underperforming assets should have rebased in FY18, and finally the boost from AEIs such as the recently refurbished Novotel Sydney Darling Square.

Gearing up for opportunities.

  • Frasers Hospitality Trust (FHT) is now in a strong position to pursue acquisition opportunities as its gearing stands at 33- 34%. In our view, DPU-accretive acquisitions would be the next re-rating catalyst for FHT. 
  • Our confidence in FHT’s ability to execute on its inorganic strategy is underpinned by its successful track record such as the purchase of Sofitel Sydney Wentworth and Novotel Melbourne.

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 net property income.

WHAT’S NEW - Near term headwinds in Sydney

Weaker than expected 2Q18 results

  • Frasers Hospitality Trust (FHT)'s 2Q18 DPU came in weaker than expected falling 8% y-o-y to 1.11 Scts, resulting in 1H18 DPU falling 4% y-o-y to 2.42 Scts.
  • The underperformance was due to broad weakness across FHT’s portfolio.

Key markets of Australia and Singapore muted

  • The key markets of Australia and Singapore which contribute c.40-50% and 20-25% of FHT’s revenue and NPI respectively had a relatively soft quarter.
  • In Australia, while 2Q18 RevPAR was flat y-o-y at A$231, both gross operating performance (GOR) and gross operating profit (GOP) fell 1% and 12% respectively. The declines were largely caused by a tougher trading environment in Sydney which registered softer demand from domestic Australian corporates. Earnings contribution was also impacted by Novotel Sydney Darling Square which is still ramping up from its recently completed AEI and A$0.9m write-back of consultancy fees in 2Q17. 
  • Partially offsetting the weakness in Sydney was Novotel Melbourne on Collins which we understand delivered a low double digit increase in RevPAR.
  • Overall, owing also to the weak AUD, 2Q18 NPI from Australia in SGD terms fell 16% y-o-y.
  • Meanwhile, 2Q18 NPI for the Singapore portfolio fell 4% y-o-y. The weak performance was largely due to tough trading conditions at Frasers Suites Singapore (FSSG) which resulted in overall Singapore RevPAR dropping 4% y-o-y to S$248. The results could have been worse off if not for InterContinental Singapore recording an increase in RevPAR.

UK hit by cold snap and stronger GBP

  • 2Q18 NPI from UK was down 4% y-o-y due to softer corporate demand and impact of the recent cold snap which resulted in higher heating costs and leisure demand. Furthermore, the rise in GBP has also tempered demand from leisure guests and FHT continues to be hit by increases in the minimum wage.

Japan stable but Malaysia down

  • ANA Crowne Plaza Kobe had a decent 2Q18. Although RevPAR was down to JPY9,527 from JPY9,734 resulting in GOR declining 3% y-o-y, however, good cost containment led to a 4% y-o-y rise in GOP.
  • Following an improvement at Westin KL over the past few quarters, both GOR and GOP fell 6% and 9% y- o-y respectively. This is due to the reopening of the refurbished luxury hotels (JW Marriott and Ritz Carlton) drawing away guests from the Westin.
  • RevPAR for Malaysia fell 5% y-o-y

Strong balance sheet

  • FHT continues to have a strong balance sheet with gearing stable at c.33%.
  • Effective cost of borrowing fell to 2.7% from 2.8% in 4Q17 but was up against 2.6% achieved in 2Q18.
  • Around 90% of FHT’s borrowings are fixed.

Rebasing DPU estimates

  • On the back of the weaker than expected results and guidance of soft corporate demand in Sydney, we have lowered our FY8-20F DPU by 6-8% and lowered our DCF-based Target Price to S$0.83 from S$0.89 previously.
  • For Sydney, we now project flattish ADR performance compared to an increase previously.
  • In addition, we have also lower ADR assumptions for Frasers Suites in Singapore, now projecting a decline y-o-y versus our prior assumption of an uplift in room rates.

Maintain BUY with a revised Target Price of S$0.83

  • Despite disappointing earnings in 2Q18, we retain our BUY call with a revised Target Price of S$0.83.
  • We believe at current levels, FHT offers an attractive yield and for more patient investors, an opportunity to accumulate a REIT with quality properties in prime locations in key global cities at a 10% discount to book.

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | 2018-04-27
SGX Stock Analyst Report BUY Maintain BUY 0.83 Down 0.890