Frasers Hospitality Trust - Maybank Research 2022-06-13: Patience Rewarded


Frasers Hospitality Trust - Patience Rewarded

Privatisation of FHT at a premium

  • Frasers Hospitality Trust (SGX:ACV) has received a privatisation offer via a trust scheme of arrangement, from sponsor Frasers Property Limited (SGX:TQ5) at S$0.70/unit, to be paid fully in cash, as a result of a strategic review announced on 8 Apr 2022. The deal should return ~23% to IPO investors, and unitholders to exit at 6-52% premiums, ahead of an uneven DPU recovery amid rising macro headwinds.
  • We think completion risk is low, given the attractive valuation, which is at ~27% above our S$0.55 DDM-based target price (COE: 5.9%, LTG: 2%). We recommend investors accept the offer, and see investment options in the other hospitality REIT names.
  • We see CDL Hospitality Trusts (SGX:J85) as the best hospitality sector recovery proxy, and like Far East Hospitality Trust (SGX:Q5T)’s pure-play Singapore assets. Both are trading below their NAVs.

Uncertain RevPAR trajectory

  • Frasers Hospitality Trust's RevPAR growth trajectory remains uneven, even as sector fundamentals are improving, with opening borders adding tailwinds to demand recovery. Frasers Hospitality Trust’s NAV has fallen by ~22% while DPU declined ~87% since its FY16 IPO, even as it closed S$565m of acquisitions and S$60m in AEIs to deliver ~35% AUM growth.
  • While management cited headwinds from inflationary pressures, rising interest rates, and to a lesser extent, likely weakening of its operational currencies against S$, we forecast 36% 3-year DPU CAGR through FY24E, implying a 3.1% FY23E DPU yield, as NAV rises at ~4%.

Lack of scale limits AUM growth

  • Frasers Hospitality Trust lacks scale; it ranks among the smallest S-REITs by market cap, and remains the smallest hospitality REIT under coverage. Low trading liquidity from a small free-float which will likely need to climb over 4x to be considered for index inclusion, and high trading yields, will limit acquisition growth opportunities, in our view.
  • A sale of its platform to Frasers Property Limited could accelerate capital recycling of its well-placed hospitality assets, ahead of management’s other strategic options.

Attractive exit valuation

Chua Su Tye Maybank Research | https://www.maybank-ke.com.sg/ 2022-06-13
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