4Q/FY in line, slightly lowered DPUs

• Frasers Hospitality Trust (FHT)’s 4Q18 DPU of SGD1.22ct (-4.8% y-o-y, +8.9% q-o-q) was in line with both consensus and our estimates.
• Stable performance for its properties in Singapore and Germany mitigated the weaker results across the rest of its portfolio. Its Singapore assets are positioned for a recovery in the hospitality sector, even as we expect near-term RevPAR growth to be tempered by competitive supply-side pressures within its micro-market.
• We lower DPUs 1-2% by reducing Australia RevPARs and introduce FY21 estimates. Our DDM-based Target Price remains unchanged at SGD0.80 (COE: 7.6%, LTG: 2.0%).
• Valuation remains undemanding versus history and peers in our view at 0.8x FY19E P/B, and low 33.6% gearing supporting acquisition growth upside.
• BUY.

Drag from Australia, Japan, and Malaysia

• Frasers Hospitality Trust’s Australia and Japan properties were weaker while the Westin KL saw a sharper -14.8% y-o-y and -21.6% y-o-y in gross operating revenue (GOR) and profit (GOP) on slow corporate demand. In contrast, the Maritam Hotel Dresden reported +4.6% y-o-y in GOR and +3.4% y-o-y in GOP.
• We see better visibility in Europe for its demand-supply balance.
• We believe there are opportunities for management to undertake a meaningful portfolio repositioning exercise given supply-side headwinds in Australia, now at a-third of its AUM (according to Horwath, the majority of 4,600 new rooms from 2019-2022 will open in 2019-20) and stronger growth fundamentals in Europe, especially being supported by its sponsor’s growing AUM.

Recovery in SG; supply pressure in micro-market

• Its Singapore portfolio remained stable, with GOR/GOP up 0.2% y-o-y/1.5% y-o-y. This was driven by increased occupancies (from 88.1% to 90.3%) at the two properties and operating efficiency at Fraser Suites, even as RevPARs fell 1.3% y-o-y on lower average daily rates for InterContinental.
• The competitive pressure on RevPAR is likely to persist in the near term with room supply from new players (Andaz and JW Marriott) in the Bugis micro-market.

Swing Factors

Upside

• Earlier-than-expected pick-up in corporate demand.
• Better-than-anticipated RevPAR.
• Accretive acquisitions where cap rates exceed cost of funds, or divestments at low cap rates which unlock asset values.

Downside

• Sizeable increases in hotel and SR room supply without commensurate growth in demand.
• Deterioration in global economy, resulting in declines in RevPARs.
• Significant volatility in FX rates could impede hedging efforts and affect DPU.
• Sharper-than-expected rise in interest rates could increase cost of debt and hit earnings, with higher cost of capital lowering valuations.