Frasers Hospitality Trust 2HFY20 - 2020-11-03: Resumption Of Domestic Travel Provides Catalyst For Recovery

FRASERS HOSPITALITY TRUST (SGX:ACV)

Frasers Hospitality Trust 2HFY20 - Resumption Of Domestic Travel Provides Catalyst For Recovery

Frasers Hospitality Trust 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.
Frasers Hospitality Trust provides distribution yields of 4.3% for FY21F and 8.8% for FY22F.
Frasers Hospitality Trust is trading at a 37% discount to NAV of S$0.63/share. Maintain BUY and target price of S$0.55.

In 4QFY20, Frasers Hospitality Trust (SGX:ACV)’s Australia portfolio occupancy declined 51.2ppt y-o-y to 35% and RevPAR declined 78.5%. This was due to international tourist arrivals falling 70.5% y-o-y in 8M20 and the state of Victoria undergoing a hard lockdown since early-August. However, this impact was partially offset by two of its hotels’ participation in the isolation business.
Sofitel Sydney Wentworth and Novotel Melbourne on Collins hosted returning Australian residents serving quarantine orders. Both hotels have secured new contracts for the isolation business starting Oct 20.

After operations were suspended at all properties in 3QFY20 due to government-imposed closures, all of Frasers Hospitality Trust’s UK properties with the exception of ibis Styles London Gloucester Road (ISLG) reopened in 4QFY20. The ISLG hotel remains closed due to its reliance on transient business travel, which is still experiencing soft demand.
The UK will enter a second national lockdown lasting four weeks from 5 Nov to 2 Dec 20. Frasers Hospitality Trust’s short-term accommodation may be mandated to close again. However, the furlough scheme was reinstated at 80% of wages paid to employees and this payroll assistance will help Frasers Hospitality Trust mitigate some costs.

In 2HFY20, Frasers Hospitality Trust’s Singapore portfolio reported a 61.2% y-o-y decline in gross operating revenue and a 53.2% y-o-y decline in gross operating profit. This was mainly due to lower room rates as the Stay Home Notice (SHN) business resulted in low room rates for InterContinental Singapore (ICSG). ICSG has ceased to serve as a SHN facility in early-September and will refocus on the corporate and leisure businesses, including business travellers from countries with fast lane arrangements, such as China and Hong Kong, and locals taking up staycation packages.

Frasers Hospitality Trust incurred negative distributable income of S$1.7m in 2HFY20 because actual rental income received in 2HFY20 was lower than pro-rated contractual fixed rents. Surplus rental income in 1HFY20 (variable rent) was used to offset the shortfall in rental income in 2HFY20.

Frasers Hospitality Trust recognised change in fair value of investment properties of a negative S$136.8m. Portfolio valuation dropped 3.5% y-o-y to S$2.25b, moderated by the strength in functional currencies against the Singapore dollar.
Frasers Hospitality Trust's NAV per unit declined from S$0.73 to S$0.65.

Frasers Hospitality Trust has exercised prudence to retain S$25.3m of distributable income in 1HFY20, of which S$22.3m was returned to unitholders in 2HFY20, notwithstanding negative distributable income of S$1.7m. Only S$3m was retained for working capital.
Frasers Hospitality Trust’s payout ratio was 90% for FY20.

Frasers Hospitality Trust does not have any bank loans due for refinancing until Jul 22. Debt maturity is well spread out with weighted average debt maturity at 3.6 years. It has S$90m of revolving credit facility available for drawdown.
Frasers Hospitality Trust's gearing remained healthy at 37.7% and interest coverage ratio was 2.3x as of Sep 20 despite a challenging operating environment.

The recovery in international travel is threatened by a new wave of COVID-19 infections spreading across Europe and the UK. Domestic travel is likely to gain traction, given the prolonged closure of international borders. The timing of recovery is contingent on development of effective COVID-19 vaccines and accurate rapid antigen tests.
We expect a recovery to take place in mid-21 and normalcy to return in 2H21. Currently, all but two of Frasers Hospitality Trust’s properties have resumed operations.

Melbourne has reopened on 28 Oct 20 after a hard lockdown lasting more than three months. Residents are allowed to leave their homes. However, a 25km travel limit and the “ring of steel” between metropolitan Melbourne and regional Victoria remain in place until 2 Nov 20. Some companies have instructed employees to start returning to the office. The Business Council of Australia is lobbying for reopening all state borders by Christmas.

Nicola Ho UOB Kay Hian Research | Jonathan Koh CFA UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-03

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