Frasers Hospitality Trust - DBS Research 2020-11-26: Rebound Is Underway; A Laggard No Longer.


Frasers Hospitality Trust - Rebound Is Underway; A Laggard No Longer.

  • Anticipate Frasers Hospitality Trust to ride the impending recovery in the travel sector in 2021 post vaccine distribution.
  • Portfolio anchored in key markets of Australia, UK and Singapore with potential for gradual border re-opening.
  • Earnings rebased to assume a 4-year normalisation period but growth is in excess of 20% CAGR.

Strong rebound in operating metrics projected.

  • While we believe that 2021 brings much promise for the hospitality sector, the growth trajectory will likely differ drastically between markets and hospitality asset types. Given that most governments will likely be more cautious and gradual in their plans to re-open their borders to allow international tourists post the mass distribution of a vaccine, the focus will be on domestic travel markets in the meantime.
  • Therefore, countries with good domestic market demand such as China, Japan, Europe, the USA and Australia would recover first. Destinations with a focus on international travel, like Singapore, while starting to re-open her borders in 4Q20 to selected countries, will most likely see a more lagged pace of recovery.

Domestic markets to lead the rebound.

  • Frasers Hospitality Trust (SGX:ACV) is one of the more diversified S-REITs among its peers with many opportunities to tap on the gradual re-opening of the global hospitality sector. Its exposures – UK and Australia are staring to relax its domestic travel restrictions which bodes well for its portfolio performance in the coming quarters while its Singapore hotels should benefit from the robust demand for staycations and gradual re-opening of the borders.
  • While the path back to pre-COVID levels may be a couple of years away, we are optimistic on Frasers Hospitality Trust’s growth trajectory upon the mass distribution of a vaccine globally. Distributions (or distributions per unit (DPU)) should accelerate accordingly. We conservatively assume a 4-year trajectory back to normalcy in our estimates (on front end loaded growth) but acknowledge that the timing remains fluid for now.

Ability to outperform our estimates.

  • In our scenario analysis of a 68%/89%/95%/100% catch up in RevPARs compared to pre-COVID levels in our models, Frasers Hospitality Trust should achieve 90% of its pre-COVID-19 DPU by FY22, driven from a mix of organic growth and acquisitions.
  • In a more bullish scenario, Frasers Hospitality Trust may exceed its pre-COVID-19 DPU by FY23.

Compelling value.

  • We maintain our view that Frasers Hospitality Trust offers compelling value at 0.7x P/NAV, which is below replacement costs. The current price which is 40% below pre-COVID level remains an attractive level for investors for an overlooked stock.
  • Prospective FY22F yields of c.8.0% is attractive.

A laggard no longer.

A privatisation candidate?

  • Given the Sponsor’s significant 62% stake in Frasers Hospitality Trust and relative illiquidity vs peers, we believe that the stock remains an attractive take-over target given that it cost less than S$500m to take it private and gain control of Frasers Hospitality Trust's portfolio of c.4000 room keys and landmark Singapore hotels.

Derek TAN DBS Group Research | Geraldine WONG DBS Research | https://www.dbsvickers.com/ 2020-11-26
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