Frasers Hospitality Trust - UOB Kay Hian 2018-10-29: 4QFY18 In Line

FRASERS HOSPITALITY TRUST (SGX:ACV)

Frasers Hospitality Trust - 4QFY18: In Line

Frasers Hospitality Trust (FHT)’s FY18 results are in line.
FHT’s Singapore portfolio continued to do well, but we continue to see weakness across its properties in Australia and Malaysia.
Maintain BUY with an unchanged target price of S$0.82.

Frasers Hospitality Trust (FHT) reported 4QFY18 DPU of 1.2154 S cents (-4.8% y-o-y) due to lower NPI and a write-back of tax provision, bringing FY18 DPU to 4.7613 S cents. 4QFY18 gross revenue and NPI were both down 6.9% and 6.7% y-o-y respectively, due to overall weaker portfolio performances except for its Singapore and Germany portfolios.
Results are broadly in line with expectations, with FY18 DPU representing 97% of our full-year estimates.

.. mainly attributable to Fraser Suites Singapore (FSSG) seeing higher room revenues and better operating efficiencies.
Management alluded that in adherence to URA ruling, FSSG has been gearing towards core-long stays which usually charge lower rates (vs short-stays). The longer-staying segments also incur lower costs, and provide better room margins.
Compared with the period before URA ruling, FSSG has seen higher occupancies but lower ADR. FSSG is also more susceptible to corporate demand, namely project groups.
InterContinental Singapore (ICSG) has seen good F&B performance, although its room rates continue to be challenged due to new competition in the local Bugis precinct. Before, ICSG was the only international branded hotel in the area. Management noted that the nearby Andaz has a natural advantage over corporate accounts in Bugis Duo, while JW Marriot has an edge over corporate accounts in South Beach.
Management has guided for 2019 outlook to be better, as occupancies in these two hotels ramp up, reducing the need for price competition. ICSG has also stepped up its offerings, such as a S$1.85m renovation to rejuvenate its bar.

Frasers Hospitality Trust’s Australia RevPAR grew 0.5% y-o-y to A$197, on the back of higher occupancies of 87.5% (vs 4QFY17: 85.2%). Management noted the weaker Sydney market with room rates declining in general for other players, due to weaker corporate demand (ie such as fewer corporate events taking place) and supply growth at the airport and city areas.
However, Novotel Sydney Darling Square maintained stable ADRs, and also performed better due to its full room inventory (as compared to last year when it was undergoing renovation). Novotel Melbourne on Collins also performed well, with RevPAR growing at 8.1%.
Management noted CBRE report that the Melbourne market will be adding more supply, which may affect room rate growth going forward.

Malaysia’s RevPAR declined 14% y-o-y due to lower occupancies and ADRs. Post-general elections, corporate demand (such as consulting accounts, like BCG, and Oil&Gas corporates) has reduced significantly (ie 4,000 room nights). While The Westin KL (TWKL) has lowered prices to fill vacant rooms with public business, they also face price competition in the local market from Ritz Carlton and JW Marriot. So far, TWKL has been able to maintain its market share vs its peers.

The Japan portfolio saw lower gross operating revenue (-11% y-o-y) due to the closure of banquet space for replacement of partition walls, as well as cancellations as a result of Typhoon Jebi and Typhoon Cimaron. Japan’s gross operating profit declined only 8.7%, due to productivity and efficiency gains achieved by its F&B division.
The UK portfolio saw gross operating revenue grow 1.5%, but gross operating profit declined 2.6% due to higher maintenance costs incurred by some London properties. Ibis Styles London Gloucester Road (ISLG) also had 33 rooms affected by renovations (which began in Aug 18), and renovations for the remaining rooms and public areas will only complete by Dec 18 and Mar 19 respectively.

The proportion of fixed-rate borrowings was 73.3%, while the effective interest rate maintained stable at 2.6% (flat q-o-q).

Our valuation is based on DDM (required rate of return: 8.2%, terminal growth of 2.5%).

Loke Peihao UOB Kay Hian Research | Andrew Chow CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-10-29

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