Frasers Hospitality Trust - UOB Kay Hian 2019-02-01: 1QFY19 In Line

FRASERS HOSPITALITY TRUST (SGX:ACV)

Frasers Hospitality Trust - 1QFY19 In Line

Frasers Hospitality Trust was affected by weaker performances from its Malaysia and Japan properties. Otherwise, RevPAR improved in Australia (+2.6% y-o-y) and the UK (+8.2 y-o-y).
Maintain BUY and target price of S$0.82.

FRASERS HOSPITALITY TRUST (SGX:ACV)'s 1QFY19 DPU of 1.2542 S cents (-4.3%) formed 25.5% of our full-year estimate. Gross revenue and NPI were down 2.0% and 1.2% y-o-y respectively due to weaker performances from Malaysia and Japan portfolios.

Singapore RevPAR declined 1.8% y-o-y due to lower ADR at InterContinental Singapore (ICSG) and Fraser Suites Singapore (FSS).
InterContinental Singapore continued to see competition from new entrants (Andaz Singapore and JW Marriot South Beach) in the Bugis precinct, which are managed by professional chains with large distribution networks. In particular, Andaz Singapore has been pricing aggressively for their public business. Management guided that once these new entrants ramped up their occupancies to above 85%, they may start raising rates and alleviate the pricing pressure.
Fraser Suites Singapore saw softness in corporate long-stay demand, which typically depends on corporate relocations and project work groups. Management is maintaining a cautious outlook on such demand, given the current economic climate.

Australia RevPAR grew 2.7% y-o-y on the back of higher occupancy (+1.8ppt y-o-y) and ADR (+0.8% y-o-y).
Novotel Sydney Darling Square (NSDS) performed better y-o-y with the return to full-room inventory and higher ADR, which led to RevPAR rising 19.7% y-o-y. Novotel Melbourne on Collins also saw RevPAR grow 3.7% y-o-y on higher occupancies.

Malaysia RevPAR declined 11.6% y-o-y due to lower occupancies and ADRs. Room and F&B revenue were affected by weak corporate demand in Kuala Lumpur. Corporates are taking advantage of the weak economic climate and renewing their contracts at lower rates. Regardless, The Westin KL maintained its market share vs peers.
At the same time, there has been a wave of new hotel openings in Kula Lumpur, including Pavilion Hotel KL (managed by BANYAN TREE HOLDINGS LIMITED (SGX:B58)) which opened right opposite The Westin KL (TWKL). In its vicinity, both JW Marriot and Ritz Carlton are also maintaining their rates despite having undergone renovations.
Management noted that demand from The Westin KL’s key accounts in consulting, such as those with links to government projects, as well as the oil & gas sector, remains uncertain.

Japan portfolio saw lower GOR (-4.4% y-o-y), dragged by lower wedding and year-end social events.
According to management, ANA Crowne Plaza Kobe has a higher F&B component (vs most of Frasers Hospitality Trust properties), and revenue split comprising 50% room/50% F&B. Banquet (a sub-division of F&B) making up 30-35% of the hotel’s GOR.
Management explained that the ballroom was under renovation for about two months. Frasers Hospitality Trust is looking at replacement demand from business meetings.
GOP declined even more at 13.8% y-o-y due to the timing of staff bonus write-back. As compared to 1QFY18, staff bonus write-back was absent in 1QFY19 (been recognised in 4QFY18).

UK RevPAR grew 9.2% y-o-y, helped by all properties (except Ibis Styles London Gloucester Road as renovation works resulted in 51 guest rooms being taken out of inventory).
Management guided that demand is being supported by a favourable British pound (as compared to currencies of its key source markets).

Gearing rose to 34.4% (+0.8ppt q-o-q). Fixed-rate borrowings accounted for 73.5% of total borrowings. Frasers Hospitality Trust’s effective cost of borrowing remained low at 2.5% (-0.1ppt q-o-q). Interest cover ratio remained healthy at 5.3x.
Frasers Hospitality Trust has debts of S$385.4m to be refinanced in 2019.

According to STB, visitor arrivals from China turned negative (-12.4% y-o-y) in Nov 18. Management noted that they have not seen much impact on their business.
Frasers Hospitality Trust’s exposure to Chinese visitors is fairly low as most Chinese demand is concentrated in the mid-range segment (whereas most of Frasers Hospitality Trust hotels are in the higher-end/luxury segment).

Maintain BUY and target price of S$0.82, based on DDM (required return: 8.2% and terminal growth of 2.5%).
Frasers Hospitality Trust currently trades at an attractive distribution yield of 6.7% for FY19.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-02-01

SGX Stock Analyst Report BUY MAINTAIN BUY 0.820 SAME 0.820