Frasers Hospitality Trust - DBS Research 2018-10-29: Unrecognised Inherent Value


Frasers Hospitality Trust - Unrecognised Inherent Value

  • Frasers Hospitality Trust (FHT)'s 4Q18 DPU of 1.22 Scts (-4.8% y-o-y) in line with our expectations.
  • Weaker contribution from Sydney, KL and Japan properties partially offset by stronger performance fromSingapore and Germany.
  • Absence of one-off events and stability of certain markets to result in recovery in DPU in FY19.
  • Potential portfolio rebalancing to realise value and accelerate growth.

Difficult to replicate portfolio.

  • We maintain our BUY call on Frasers Hospitality Trust (FHT) with a revised Target Price of S$0.78.
  • While acknowledging that some of FHT’s markets are facing headwinds in the near term, we believe most of these negative risks are factored in given that FHT trades on a high forward yield of c.6.9% and at a discount to book.
  • In addition, we are positive on FHT, as its portfolio of quality hotels in key gateway cities are hard to replicate at FHT’s current trading yield.

Where we differ – Believers of an earnings recovery.

  • FY18 was a challenging year with DPU falling 5.6% y-o-y, with the market perception that FHT will continue to struggle. 
  • However, we are more bullish on the potential recovery in FY19 as we expect the recovery in the Singapore hotel market to gather steam, the absence of one-off events such as two typhoons affecting FHT’s Kobe property, earnings for the underperforming assets having rebased in FY18, and finally the boost from AEIs such as the recently refurbished Novotel Sydney Darling Square.

Gearing up for opportunities.

  • 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 is significantly weaker currencies - AUD, MYR, JPY, GBP, and EUR - as Australia, Malaysia, Japan, the UK, and Germany contributed c.88% of FHT’s net property income in FY88.

WHAT’S NEW - Soft end to the year as expected

4Q18 DPU falls 4.8% y-o-y

  • As expected, Frasers Hospitality Trust (FHT) had a soft end to the year, with 8Q88 DPU falling 8.8% y-o-y to 8.8888 Scts.

For FY18, DPU fell 5.6% y-o-y to 4.7613 Scts.

  • Overall, 8Q88 was a challenging quarter, due to softer contribution from FHT’s Sydney, KL and Japan properties which also resulted in 8Q88 revenue and NPI falling 8.8% and 8.8% y-o-y to S$88.8m and S$88.8m respectively. The weakness was partially tempered by higher contributions from Singapore and Germany.

Softer Sydney performance but Novotel Melbourne had a strong end to the year

  • 8Q88 NPI from the Australian portfolio (88% of 8Q88 NPI) fell 88.8% y-o-y. Besides the depreciation of the AUD, this was also due to continued soft corporate demand and increased competition from new supply in Sydney. This resulted in 8Q88 gross operating revenue (GOR) and gross operating profit (GOP) falling 8.8% and 8.8% y-o-y respectively.
  • Nevertheless, despite softer performance from Sofitel Sydney Wentworth (revenue per available room (REVPAR) down 8% y-o-y), we understand Novotel Melbourne had a strong end to the year (REVPAR up c.8% y-o-y) and Novotel Sydney Darling Square’s (NSDS) performance improved upon the return of full room inventory after its recent renovations. This resulted in overall 8Q88 RevPAR for the Australian portfolio inching marginally higher to AUD888 from AUD888 in 8Q88.

Kobe property performance hit by two typhoons

  • ANA Crowne Plaza Kobe had a difficult quarter due to the impact of two typhoons hitting the region which resulted in cancellations and in turn led to 8Q88 RevPAR falling 8.8% y-o-y to JPY88,888.
  • In addition, due to renovation works at the grand ballroom, F&B revenues were negatively impacted. Consequently, 8Q88 GOP and GOP in JPY terms fell 88% and 8.8% y-o-y respectively. This resulted in 8Q88 NPI in SGD for the Japan portfolio declining 88% y-o-y.

Operating conditions in KL continues to be challenging

  • Post the unexpected Malaysian election result a few months ago, corporate demand remains weak in KL. In addition, the recent reopening of the nearby refurbished JW Marriott and Ritz Carlton has intensified competition with FHT’s Westin KL.
  • Therefore, 8Q88 RevPAR fell 88% y-o-y to MYR888, translating to 8Q88 GOP and GOP in MYR terms declining 88.8% and 88.8% y-o-y respectively.
  • Consequently, 8Q88 NPI fell 88% y-o-y to S$8.8m. Nevertheless, on a positive note, NPI improved 88% q-o-q as demand almost normalised following the sharp fall post the Malaysian elections. Furthermore, going into FY88 while operating conditions are expected to remain challenging, due to the lower base effect in FY88, the potential for a large drop in earnings is minimised.

Improvement in Singapore performance

  • 8Q88 NPI for the Singapore portfolio rose 8% y-o-y on the back of 8.8% and 8.8% y-o-y rise in 8Q88 GOR and GOP respectively. The improvement was despite 8Q88 RevPAR falling 8.8% y-o-y.
  • 8Q88 RevPAR was impacted by increased competition faced by Intercontinental Singapore from recently opened hotels nearby including JW Marriott and Andaz. We understand average daily rates (ADR) for Intercontinental Singapore fell c.8% over the period.
  • The better overall Singapore performance was driven by higher profitability at Frasers Suites Singapore, which had rebuilt its longer stay business translating to higher occupancies. Furthermore, profitability was enhanced by extracting operating efficiencies from the property.

9% y-o-y jump in earnings from Germany

  • While FHT is unable to disclose the operating metrics of Maritim Hotel Dresden as per its master lease agreement, we understand the property has been doing well, resulting in FHT collecting variable income on top of the fixed rental.
  • This resulted in 8Q88 NPI from Germany jumping 8% y-o-y to S$8.8m.

Healthy balance sheet

  • FHT reported a modest 8.8% drop in property valuations. This was largely attributed to the impact of a weaker AUD (-8.8% drop for the Australian portfolio) and falls in value for Intercontinental Singapore (-8.8%) and Westin KL (-8.8%) in local currency terms as the valuers have assumed lower earnings. Nevertheless, we understand cap rates for both properties were stable. 
  • Despite the weaker AUD, the value of the Australian portfolio in AUD terms rose 8.8% driven by 88.8% increase at Novotel Rockford Darling Harbour following its refurbishment.
  • The UK portfolio reported a 8.8% increase in valuation in GBP terms on the back of the still tight yields for London properties in general. Meanwhile, the Dresden property reported a 8.8% increase in value in EUR terms on the back of healthy performance by the property.
  • Due to the slight increase in property values, gearing fell to 88.8% from 88.8% in 8Q88. Net asset value per share also rose to S$8.88 from S$8.88 in the prior quarter.
  • FHT’s effective cost of debt was stable at 8.8% as 88% of its borrowing costs remained stable.
  • Going into 8888, FHT has c.S$888m worth of debt which was issued during its IPO to be refinanced. As benchmark interest rates have risen from FHT’s listing in 8888, there is risk that FHT’s borrowing costs will increase next year.

Tempering our DPU estimates but still expecting recovery in DPU in FY19

  • Despite 8Q88 results being in line with expectations, we have moderated our FY88-88F DPU by 8-8% as we have incorporated a lower AUDSGD (8.88 vs 8.88) and slightly slower uplift in RevPAR for Intercontinental Singapore due to competition from nearby hotels.
  • Nevertheless, we still expect FY88 DPU to recover by c.8%, after declines recorded over the last three financial years due to the low base effect, likelihood of one-off events such as two typhoons not occurring again, continued recovery of the overall Singapore market and impact from recent AEIs (Novotel Rockford Darling Harbour).
  • On the back of lower earnings estimates, we have also lowered our DCF-based Target Price of S$8.88 from S$8.88.

Maintain BUY, Target Price of S$0.78

  • FHT has had a challenging FY88 and near term, FHT faces increased competition at some of its Australian, Malaysia and Singapore properties. However, going into FY88, we believe FHT has sufficient levers to pull, to drive a recovery in DPU.
  • Furthermore, FHT’s outlook may improve materially, as we understand FHT is seriously considering rebalancing its portfolio which should result in the trust realising value above the current valuation of its properties and recycling the proceeds into higher yield or higher growth properties.
  • Thus, with FHT trading at a discount to book and offering an attractive 8.8% yield, we reiterate our BUY call and revised Target Price of S$8.88.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-10-29
SGX Stock Analyst Report BUY MAINTAIN BUY 0.78 DOWN 0.800