Frasers Hospitality Trust - DBS Research 2018-07-30: Irreplaceable Hotel Portfolio

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FRASERS HOSPITALITY TRUST SGX:ACV

Frasers Hospitality Trust (FHT) - Irreplaceable Hotel Portfolio

• FHT’s 3Q18 DPU of 1.13 Scts (-9% y-o-y) below expectations.
• Results impacted by continued softness in corporate demand in Sydney and near term competitive landscape in FHT’s micro-market in Singapore.
• Market focused on short term DPU performance but forgetting inherent value with FHT trading at 10% discount to a conservatively valued book.

Difficult to replicate portfolio.

• We maintain our BUY call on Frasers Hospitality Trust (FHT) with a revised Target Price of S$0.80. 
• While near term DPU is likely to be under pressure, we believe with FHT offering a high 6.7% yield, c.50-60bps premium above its hospitality peers, it deserves a re-look 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.

~ SGinvestors.io ~ Where SG investors share

Where we differ – Believers of an earnings recovery.

• Year to date FY18 DPU has disappointed, falling 6% y-o-y in 9M18. 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.

Valuation:

• After weaker than expected 3Q18 results, we lowered our DCF-based Target Price to S$0.80 from S$0.83.

Key Risks to Our View:

• FX volatility. A key risk to our positive outlook is 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 - Earnings still in transition

3Q18 results below expectations

• As expected Frasers Hospitality Trust (FHT)’s earnings remain under pressure with 3Q18 DPU falling 9% y-o-y to 1.13 Scts. However, the decline was larger than expected largely due to the impact of nearby competition surrounding Intercontinental Singapore which saw a y-o-y fall in revenue per available room. Furthermore, corporate demand remains weak in Sydney negatively impacting the performance of the Australian operations.
• As a consequence of these factors and the depreciation of the GBP, overall 3Q18 revenue and NPI fell 2% and 3% y-o-y respectively.

Key markets of Australia and Singapore muted

• Similar to 2Q18, the key markets of Australia and Singapore which contribute c.40-50% and 20-25% of Frasers Hospitality Trust (FHT)’s revenue and NPI respectively delivered another poor quarter.
• In Australia, while overall 3Q18 RevPAR marginally up to A$199 from A$195 in 3Q17, largely due to 12% y-o-y increase in RevPAR for Novotel Melbourne on Collins and Novotel Sydney Darling Square having full room inventory compared to last year when renovations were undertaken, gross operating revenue (GOR) and gross operating profit (GOP) in AUD were down 3% and 6% y-o-y, resulting in 3Q18 NPI from Australia being down 13% y-o-y. This was mainly due to the weaker performance of Sofitel Sydney Wentworth and Frasers Suites Sydney which faced heightened competition from soft corporate demand.
• The Singapore operations also lagged with 3Q18 RevPAR falling 4% y-o-y to S$243 as Intercontinental Singapore faced increased competition from JW Marriott and Andaz hotels within its micro market, and Frasers Suites Singapore pursued a strategy of maximising occupancy levels. Therefore, NPI for the Singapore operations fell 4% y-o-y.

Other markets also weaker

• Frasers Hospitality Trust (FHT)’s other markets also had a soft quarter.
• Despite, RevPAR marginally up to GBP108 from GBP107 last year and GOR and GOP rising 3% and 4% y-oy- respectively in GBP terms, NPI from the UK properties fell 4% y-o-y largely due to the depreciation of the GBP versus SGD.
• Meanwhile, FHT’s Japan property, ANA Crowne Plaza Kobe, had a challenging quarter primarily due to a softer banquet performance which resulted in GOR and GOP in JPY terms falling 5% and 3% y-o-y respectively. RevPAR for the property was relatively stable at JPY11,610.
• The Malaysian operations had a particularly difficult quarter, as both business and government spending leading up to and after the Malaysia general election fell. In addition, the Westin KL was impact by competition from the nearby refurbished hotels. These factors resulted in RevPAR, GOR and GOP falling 14%, 14% and 36% y-o-y respectively.

Strong balance sheet maintained

• Due to movements in various FX rates, gearing increased to 34% from 33% at the end of 2Q18. However, Frasers Hospitality Trust (FHT) remains in a healthy financial position to pursue future acquisitions.
• Effective cost of borrowing fell to 2.6% from 2.7% in 2Q18 with the proportion of borrowings on fixed rates still high at c.88%.

Near term headwinds but better prospects next financial year

• Near term, we expect Frasers Hospitality Trust (FHT) to continue to face several headwinds in the form of softer corporate demand in Sydney and KL as well as potentially weaker RevPAR performance for Frasers Suites Singapore as it seeks to maximise occupancy by lowering room rates.
• Thus, on the back of these headwinds and weaker than expected 3Q18 results, we lowered our FY18- 20F DPU by 2-5% and DCF-based Target Price to S$0.80 from S$0.83.
• Nevertheless, heading into FY19, we believe once demand normalises across FHT’s various market, we believe FHT DPU will resume its growth path.

Maintain BUY with a revised Target Price of S$0.80

• We continue to believe at current levels, Frasers Hospitality Trust (FHT) offers an attractive yield and an opportunity to accumulate a REIT with hard to replicate portfolio of quality properties in key gateway cities at a 10% discount to book, while its earnings are in transition during FY18.
• Thus, we maintain our BUY call with a revised Target Price of S$0.80.

Mervin SONG CFA DBS Group Research Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-07-30

SGX Stock Analyst Report BUY Maintain BUY 0.80 Down 0.830