Frasers Hospitality Trust - UOB Kay Hian 2020-07-16: Resumption Of Domestic Travel Provides Catalyst For Recovery


Frasers Hospitality Trust - Resumption Of Domestic Travel Provides Catalyst For Recovery

  • Frasers Hospitality Trust (SGX:ACV) provides exposure to a global hospitality portfolio with geographical diversity of 15 quality assets across nine key gateway cities in Asia, Australia and Europe. We see potential for recovery in domestic travel in Australia and the UK. In particular, the UK will establish travel corridors, which will usher in tourists, especially from continental Europe.
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  • Our target price of S$0.58 is based on DDM (cost of equity: 7.5%, terminal growth: 1.8%).

Frasers Hospitality Trust - Investment Highlights


  • No place for complacency in Australia. Australia took decisive counter-measures with Prime Minister Scott Morrison warning that COVID-19 is a “once in 100 years” event. It was among the first to ban travel from China on 1 Feb 20. The country treated COVID-19 as a global pandemic, way before WHO declared it as such. Australia closed all its borders since 20 Mar 20. In New South Wales (NSW) and Victoria, all F&B outlets were ordered to shut down on 23 Mar 20.
  • Australia has flattened the COVID-19 curve. The government has announced a three-step plan to ease safe distancing restrictions and reopen the economy as the number of local transmissions has dwindled and the COVID-19 outbreak brought under control. In Phase 1, public gathering of up to 10 people and home visitation of up to five people are allowed. Retail stores, restaurants, cafes and pubs can reopen, while students can resume face-to-face lessons in classrooms. In Phase 2, public gathering of up to 20 people is allowed. In Phase 3, gathering of up to 100 people will be allowed and interstate travel will be permitted. The government aims to complete the three phases by July.
  • Airlines resuming regional and interstate flights. National carrier Qantas plans to scale up domestic flights from the current 5% of pre COVID-19 pandemic levels to 40% by end-July. Qantas’ budget carrier, Jetstar, had expanded from 5% to 15% of domestic capacity, or an addition of 300 return flights per week by end-June. Qantas and Jetstar had bolstered the Sydney-Melbourne route from 12 return flights to 67 return flights per week by end-June. Both airlines have ramped up flights in time for the July school holidays. Domestic travel has picked up due to pent-up demand.
  • Cheap airfares stimulate demand for domestic travel. Airlines have cut airfares to encourage pandemic-weary Australians to travel again. Qantas recently launched a big sale, which met with phenomenal success. Jetstar cut prices for 22 different routes, including Sydney-Melbourne flights, to just A$19. The government will also design a support package for the tourism sector, including incentives for Australians to travel domestically, so as to offset revenue loss from overseas visitors.
  • Localised lockdown in the state of Victoria. Melbourne has recently experienced a surge in new COVID-19 infections. The state of Victoria has re-imposed stage three lockdown on metropolitan Melbourne and Mitchell Shire in the north to rein in the transmission of COVID-19. Residents are allowed to leave their homes for four essential reasons, namely work/study, exercise, medical care and purchase of food. Some 3,000 residents in nine public housing towers were placed under “hard lockdown”. The police have increased their presence in these areas to enforce the lockdown. Borders between Victoria and other states have been closed since 7 Jul 20.
  • Resumption of international travel delayed. Qantas had cancelled international flights till 28 Mar 20. CEO Alan Joyce says he does not expect international flights to resume for another 12 months. Instead, he expects international flights to return in mid-21.
  • Recovery driven by domestic travel underway. Domestic and international travel was hard-hit by bush fires (especially NSW) in Jan-Feb 20 and the pandemic starting Mar 20. Thus, RevPAR for the Australia portfolio fell 48.6% m-o-m to A$108 in Mar 20. We see good prospects for recovery as domestic travel resumed in Jul 20. Domestic visitor arrivals accounted for 74.5% and 79.0% respectively of all visitations to Sydney and Melbourne in year ending Jun 19.


  • Phased reopening of UK economy. The government has set out a phased roadmap to gradually replace existing safe distancing restrictions with smarter measures to control the COVID-19 pandemic while reducing the social and economic costs. Workers should work from home where possible. The government has encouraged citizens who cannot work from home to go back to work but to avoid public transport. Non-essential retail shops have reopened starting 15 June. Based on step three of phase two of the government’s roadmap to ease safe distancing restrictions after lockdown, pubs, restaurants and hotels have reopened starting 4 Jul 20.
  • Airlines have resumed domestic and international flights. EasyJet has resumed domestic flights in the UK since 15 June. Half of its network will reopen by end-Jul 20, increasing to 75% in Aug 20. However, flights will be at a lower frequency, about 30% of its usual capacity, from Jul-Sep 20. Competitor Ryanair will restore 40% of its normal scheduled flights starting 1 Jul 20. It will operate a daily schedule of 1,000 flights covering 90% of its pre COVID-19 route network. British Airways, too, is expected to resume many flights in July. The resumption of flights would kick-start domestic and international travel.
  • Gradual recovery of domestic travel. The government is encouraging Britons to holiday at home. Britons are more inclined to indulge in staycations given the weaker British pound. Those unable to travel abroad are likely to book their holidays within the UK. To assist the hospitality industry, the government will consider adding more bank holidays in Oct 20 and increase funding for marketing to encourage Britons to take staycations.
  • Frasers Hospitality Trust’s hotels have reopened. The UK’s stature as a top travel destination remains undiminished. The weaker pound has attracted more visitors from China, India and Japan. Frasers Hospitality Trust’s UK properties progressively suspended operations between 27 Mar 20 and 1 Apr 20. RevPAR for the UK portfolio dropped 51.2% m-o-m to £42 in Mar 20. Since then, Frasers Hospitality Trust’s hotels have reopened in July. We see good prospects for the gradual recovery of domestic travel, boosted by Britons indulging in staycations. According to consultancy HVS, domestic leisure bookings account for about 29% of hotel bookings in London.
  • Travel corridors to usher in tourists. The government has imposed a blanket 14-day quarantine on international arrivals since 8 Jun 20. The draconian measure was designed to prevent a second wave of COVID-19 infections from overwhelming the healthcare system, but caused many holidaymakers to put off booking their vacations in the UK.
  • The government is finalising a series of travel corridors where international arrivals need not self-isolate. The Foreign Office will set up a system to classify countries based on the trajectory of COVID-19 infections and reliability of data. Britons will be able to visit all European countries, except Portugal and Sweden. Other countries include Canada, Australia, New Zealand, South Korea and Thailand. The travel corridors will also allow tourists to return to the UK, especially from continental Europe, in 2H20.


  • Staycations to partly mitigate drastic fall in tourist arrivals. Visitor arrivals to Singapore fell 85% y-o-y in Mar 20 and hit a historical low of 748 in Apr 20. Hotels can now apply to the Singapore Tourism Board to resume providing accommodation for leisure purposes. Singaporeans on staycations will partly mitigate the drastic fall in tourist arrivals. Fixed rents of S$15.7m a year represent 50.3% of gross revenue from Singapore in FY19.


  • Japan: Domestic travel resumed in Jun 20. In Japan, while international tourism has taken a hit, the government lifted its advisories on domestic travel in mid-June and is now actively promoting domestic tourism in a bid to revive the economy. This should help improve occupancy at Frasers Hospitality Trust’s ANA Crown Plaza Kobe, given that the city is a popular destination for leisure and business travel among locals.
  • Malaysia: More easing of MCO going forward. With the gradual relaxing of Malaysia’s Movement Control Order (MCO) since early Jun 20, domestic demand for hotel rooms should start to recover. Malaysia commenced the recovery phase on 10 Jun 20, under which the interstate travel ban was lifted and domestic tourism allowed. The government plans to enter a normalisation phase from 31 Aug 20, until a COVID-19 vaccine is available. Frasers Hospitality Trust aims to reopen The Westin Kuala Lumpur by July.

Sponsor-Backed Fixed Master Lease Structure Provides Downside Protection

Income visibility and stability from master lease structure.

  • Fixed rents will continue to come from Frasers Hospitality Trust’s sponsor-backed master leases on 13 of its properties. Frasers Hospitality Trust also has a third-party master lease for Maritim Dresden Hotel in Germany, which offers a corporate guarantee. This income structure over most of Frasers Hospitality Trust’s portfolio provides for minimum rent and downside protection, which shelters FHT from the full impact of the pandemic. Fixed rents are estimated at S$53m for FY19, which represents 35% of total gross revenue.

Frasers Hospitality Trust - Valuation & Recommendation

More about Frasers Hospitality Trust

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Frasers Hospitality Trust's Updates On COVID-19 Outbreaks

Fixed Rent Component From Frasers Hospitality Trust's Property

Strong Backing From Sponsor Alongside Hotel Management

Frasers Hospitality Trust's Financial Track Record

Nicola Ho UOB Kay Hian Research | Jonathan KOH CFA UOB Kay Hian | https://research.uobkayhian.com/ 2020-07-16
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