Frasers Hospitality Trust - DBS Research 2019-07-11: Supply Pressures Clouding Outlook

FRASERS HOSPITALITY TRUST (SGX:ACV)

Frasers Hospitality Trust - Supply Pressures Clouding Outlook

New supply headwinds in Australia and Japan may leadto DPU volatility in short term.
Potential asset disposals above book value may mitigate DPU volatility and hence Frasers Hospitality Trust’s share price.
Maintain HOLD on limited earnings visibility.

We maintain our HOLD call on FRASERS HOSPITALITY TRUST (SGX:ACV) with an unchanged Target Price of S$0.77.
Given that Frasers Hospitality Trust’s key Australian and Japan markets are facing supply pressures in the next few years and there is limited upside to our Target Price, we believe Frasers Hospitality Trust’s share price performance may be capped for now.

While Frasers Hospitality Trust’s DPU may face near term volatility, this does not necessarily warrant Frasers Hospitality Trust to trade at a large discount to book value. We believe Frasers Hospitality Trust’s share performance should be tied closer to the trust’s ability to crystallise the value of its assets, and thus demonstrate the conservatism of its book value. To that end, we understand Frasers Hospitality Trust is considering options to dispose its Sofitel Wentworth property in Sydney.
Frasers Hospitality Trust also has other hotels that can realise value in the medium term, through rebranding or redevelopment. These potential value-added actions should provide support to Frasers Hospitality Trust’s share price as it navigates near term challenges.

Frasers Hospitality Trust is in a strong position to pursue acquisition opportunities as its gearing stands at 33- 34%. Any successful DPU-accretive acquisitions may act as a re-rating catalyst for the stock or at the very least mitigate any downside risk to Frasers Hospitality Trust’s share price.

Frasers Hospitality Trust’s key markets of Sydney and Melbourne (c.40% of NPI) face potentially up to 29% and 45% increase in new room supply over the next few years according to CBRE.
Likewise, Frasers Hospitality Trust’s Kobe property (c.10% of NPI) may also face indirect supply headwinds. We understand the Kobe market typically does well when nearby Osaka market is tight and visitors seek a cheaper alternative. Kobe is approximately a 30-minute train ride from Osaka. Based on CBRE, Osaka faces c.30% increase in supply over the next few years.
While there are clear demand drivers for the Sydney, Melbourne, and Osaka/Kobe markets in the form on healthy tourist arrivals, the expected large jump in supply may cause temporary supply/demand imbalances. This in turn may lead to earnings/DPU volatility for Frasers Hospitality Trust.

On the back of the expected large increase in supply for c.50% of Frasers Hospitality Trust’s portfolio, we have moderated RevPAR assumptions as well as assumed a lower GBP/SGD, resulting in a 1% cut to our FY20-21F DPU.
However, we have maintained our DCF-based Target Price of S$0.77 as lower earnings forecast has been offset by our lower assumed risk-free rate (2.5% versus 3.0% previously) and cost of debt (3.0% versus 3.25% previously).

With a potentially cloudy outlook due to uncertainty over the impact of new supply in Australia and Japan, we believe there is limited near term re-rating catalysts for Frasers Hospitality Trust.
Thus, we maintain our HOLD call with a TP of S$0.77.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-07-11

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.770 SAME 0.770