Frasers Hospitality Trust - UOB Kay Hian 2020-08-11: 3QFY20 Domestic Tourism To Provide Some Relief

FRASERS HOSPITALITY TRUST (SGX:ACV)

Frasers Hospitality Trust - 3QFY20 Domestic Tourism To Provide Some Relief

Australia and Japan are experiencing a second wave of new COVID-19 infections. Fortunately, they are largely contained within specific states/prefectures and strict nationwide lockdowns appear unlikely.
Currently, all but two of Frasers Hospitality Trust (SGX:ACV)’s properties have resumed business operations. Domestic and regional travel should provide some relief. We see recovery in the hospitality sector delayed from 1HFY21 to 2HFY21.
Maintain BUY. Target price: S$0.54.

Restrictions on intra-state travel were lifted for New South Wales and Victoria on 1 Jun 20. Unfortunately, the Australian government has had to undertake swift measures to contain the outbreak in Melbourne, sealing off the border for the State of Victoria. While Novotel Melbourne on Collins was affected by the resurgence of new cases, Frasers Hospitality Trust’s three Sydney hotels are less impacted.
In addition, Frasers Hospitality Trust’s Australian portfolio also benefits from the government’s JobKeeper Payment scheme, which was implemented at end-March.

Given that the nationwide furlough scheme will end in October, the UK government has been cautiously pushing for economic activities to resume and has been promoting domestic tourism. Frasers Hospitality Trust’s UK properties, with the exception of ibis Styles London Gloucester Road, have gradually re-opened since 4 Jul 20. ibis Styles London is expected to re-open in mid-August. The government has exempted international arrivals from more than 70 countries from self-isolation. This will pave the way for the return of tourists, especially from continental Europe, in 220.

InterContinental Singapore is under contract with government agency for isolation purposes (stay-home notice). Fraser Suites Singapore maintained recorded occupancy of 57.3% in 3QFY20 as more than 60% of its guests were long stays. National Development Minister and co-chair of the COVID-19 taskforce Lawrence Wong warned that the travel advisory for Singaporeans to avoid international travel is likely to remain for the rest of the year. Thus, staycations among the travel-hungry local populace will provide some reprieve for Frasers Hospitality Trust.

Frasers Hospitality Trust does not have any loans due for refinancing until FY22. Debt maturing is well spread out, with no more than 30% of borrowings maturing within a year. It has S$80m of revolving credit facility available for drawdown when necessary.

Domestic travel is likely to gain traction given the prolonged closure of international borders alongside the increased desire for travel post-lockdowns. Australia, Japan and the UK have lifted restrictions on domestic travel. International and regional travel, while still muted, are likely to gradually gain momentum when countries finalise travel bubbles or corridors in order to facilitate international tourism as they wean off government-sponsored furlough and job support schemes.

We remain cautiously optimistic on Frasers Hospitality Trust given the cautious and gradual re-opening of most economic activities post-lockdowns. While Australia and Japan have experienced recent setbacks due to the second wave of new infections, they are largely contained within specific states/prefectures, and strict nationwide lockdowns appear to be unlikely. However, we see recovery in the hospitality sector delayed from 1HFY21 to 2HFY21.

We cut out FY20 DPU forecast by 27% to 1.43 S cents and FY21 by 21% to 2.19 S cents as we expect recovery in the hospitality sector to be delayed from 1HFY21 to 2HFY21.
We have assumed that Frasers Hospitality Trust retains S$2m from its distributable income in 2HFY20. We foresee Frasers Hospitality Trust’s payout ratio at 93% for FY20.

Maintain BUY. Frasers Hospitality Trust provides distribution yields of 3.3% for FY20 and 5.1% for FY21. Management is concerned about the highly uncertain duration of COVID-19 pandemic. Frasers Hospitality Trust will revalue its asset portfolio at end-FY20, but any change in valuation would not affect distributable income. Frasers Hospitality Trust may need to provide support for Novotel Melbourne on Collins, which has no third-party master leave protection. However, management intends to maintain its policy of distributing at least 90% of distributable income.
Frasers Hospitality Trust is trading at a 39% discount to NAV per share of S$0.71. Our target price of S$0.54 is based on DDM (cost of equity: 7.5%, terminal growth: 1.8%).
See Frasers Hospitality Trust Share Price; Frasers Hospitality Trust Target Price; Frasers Hospitality Trust Analyst Reports; Frasers Hospitality Trust Dividend History; Frasers Hospitality Trust Announcements; Frasers Hospitality Trust Latest News.

Nicola Ho UOB Kay Hian Research | Jonathan KOH CFA UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-11

SGX Stock Analyst Report BUY MAINTAIN BUY 0.54 DOWN 0.580