Frasers Hospitality Trust - UOB Kay Hian 2018-07-30: 2Q18 Results Below Expectations

FRASERS HOSPITALITY TRUST SGX:ACV

Frasers Hospitality Trust - 2Q18 Results Below Expectations

Frasers Hospitality Trust’s Singapore portfolio continued to do well in anticipation of a stronger 2H18 but we see weakness across its Australia and Malaysia markets.
Maintain BUY with a lower target price of S$0.82.

3QFY18 gross revenue and NPI were both down 1.8% and 2.8% y-o-y respectively due to weaker performances from its Australia and Malaysia properties. 3QFY18 DPU of 1.1226 S cents declined 9.3% y-o-y on the back of lower NPI and higher finance costs.

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In 2Q18, Frasers Hospitality Trust’s Singapore properties (InterContinental Singapore and Fraser Suites Singapore) saw better operating efficiencies, and stronger F&B revenue at the InterContinental Singapore. However, Singapore RevPAR declined 3.8% y-o-y to S$243, mainly due to Fraser Suites Singapore pursuing a volume strategy and lowering its ADR.
Management also guided a better 2H18 outlook on the back of strong demand (on increased STB marketing efforts and positive Asia-Pacific tourism outlook) and limited supply forward.

Frasers Hospitality Trust’s Australia RevPAR grew 2% y-o-y to A$199 on the back of higher occupancy of 89.5% (3QFY17: 87.2%). The trading environment in Sydney has been more competitive due to the softer corporate demand which is likely to continue into 3Q18. However, Novotel Sydney Darling Square performed better y-o-y, benefiting from its full room inventory (compared to last year when there were renovations).
Although the Sydney market will see relatively large new supply over the next three years, this is likely to be offset by strong demand, according to JLL Research. Expected increases in ADR (and stable occupancies) are likely to continue supporting Sydney RevPAR growth.
Novotel Melbourne on Collins performed well, seeing a stronger RevPAR growth of 11.6% y-o-y. However, the Melbourne hotel market is likely to stay muted for some time (with room rate growth hard to come by) due to the glut of new supply in 2018 and 2019.
Further-downside risk arising from the prevalence of home-sharing platforms in Australia, are likely to be muted, according to management. About 60-65% of its Australia hotels’ customer base are corporates, while the remaining are high-end leisure (ie given that ADR of A$200-300), which caters to different target segments from the home-sharing operators.

Frasers Hospitality Trust’s Malaysia's RevPar declined 14% y-o-y due to lower occupancies and ADRs arising from the pullback in business and government spending leading up to and after the Malaysia general elections (which saw unexpected election results, adding uncertainty to businesses and major projects), as well as softer demand from the Middle East.
Still, The Westin KL has maintained its market share vs peers. Room rates are also likely to stay stagnant in the near term in view of competitive pressure from new-room supply entering the market since last year.

Frasers Hospitality Trust’s Japan portfolio saw lower GOR (-4.9% y-o-y) due to softer banquet performance, while its GOP declined 3.2% y-o-y due to productivity and efficiency gains achieved by the F&B division. New regulations on minpaku (home-sharing) and strong demand fundamentals (ie visitor arrivals grew 15.6% y-o-y in 1H18) are expected to mitigate the negative impact of competition from the high supply levels.
Frasers Hospitality Trust’s UK properties performed better y-o-y as result of higher room rates and occupancies arising from increased leisure demand. During the quarter, the UK GOR and GOP grew 3.1% and 4.0% y-o-y respectively.

The proportion of fixed-rate borrowings was 87.8%, while the effective interest rate fell marginally to 2.6% (2QFY18: 2.7%). On our estimates, Frasers Hospitality Trust still has a debt head room of S$278m (assuming maximum gearing of 45%).

We trim our 2018 DPU forecast by 3.6%, mainly due to lowering of room rates and occupancy forecasts for Sydney properties (amid softer corporate demand) and Malaysia properties (amid soft demand from uncertainty post-elections).

This is to reflect a 25bp rise in our risk-free rate assumption to 2.75%.
Our valuation is based on DDM (required rate of return: 8.2%, terminal growth of 2.5%).

Andrew Chow CFA UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2018-07-30

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