• FRASERS HOSPITALITY TRUST (SGX:ACV)'s 2Q19 DPU of 0.98 Scts (-11.5% y-o-y) below expectations.
• New supply affected Australian earnings, partly offset by 2% rise in Singapore RevPAR; potential sale of Sofitel Wentworth presents NAV upside.
• Downgrade to HOLD, Target Price revised to S$0.77.

Downgrade to HOLD

• We downgrade FRASERS HOSPITALITY TRUST (SGX:ACV) from BUY to HOLD with a revised Target Price of S$0.77.
• Given Frasers Hospitality Trust’s key Australian market is facing supply pressures in the next one to two years and limited upside to our Target Price, we believe Frasers Hospitality Trust’s share price performance may be capped for now.

Where We Differ – NAV Upside

• While Frasers Hospitality Trust’s DPU may face near term volatility, this does not necessarily warrant Frasers Hospitality Trust to trade at a large discount to book value.
• We believe Frasers Hospitality Trust’s share price performance should be tied closer to the trust’s ability to crystallise and thus demonstrate the conservatism of its book value. To that end, we understand Frasers Hospitality Trust is open to selling its Sofitel Wentworth property in Sydney above its current book value.
• Frasers Hospitality Trust also has other hotels that can realise value in the medium term, through rebranding or redevelopment. These potential value add actions should provide support to Frasers Hospitality Trust’s share price performance while it navigates near term challenges.

Gearing Up for Opportunities

• Frasers Hospitality Trust is in a strong position to pursue acquisition opportunities as its gearing stands at 33- 34%. Potentially successful DPU-accretive acquisitions may act as a re-rating catalyst for the stock or at the very least mitigate any downside risk to Frasers Hospitality Trust’s share price performance.

Valuation

• After incorporating the weaker than expected results partially offset by lower cost of debt assumptions, we lowered our DCF-based Target Price to S$0.77 from S$0.78 previously.

Key Risks to Our View

• FX volatility. A key risk to our positive outlook is significantly weaker currencies - AUD, MYR, JPY, GBP, and EUR - as Australia, Malaysia, Japan, the UK, and Germany contributed 80% of Frasers Hospitality Trust’s net property income in FY18.

What's New - Soft Results

Negative drag from Australia and FX

• The negative impact of an increase in new room supply on Frasers Hospitality Trust’s Sydney hotels and depreciation of Frasers Hospitality Trust’s key foreign currencies (AUD,GBP and JPY) contributed to 11.5% y-o-y decline in Frasers Hospitality Trust’s 2Q19 DPU to 0.9846 Scts. This took 1H19 DPU to 2.2388 Scts (-7.6% y-o-y) which represents 46% of our FY19F DPU, which is below expectations.
• Beyond weakness in the Australian portfolio, the Malaysian and Japanese assets also suffered which contributed to the 7.6% and 9.1% y-o-y fall in 2Q19 revenue and NPI to S$34.6m and S$25.2m respectively.
• The larger decline in DPU was also caused by higher borrowing costs and additional shares from the issuance of management fee in units.

Australian headwinds

• Frasers Hospitality Trust's 2Q19 NPI for the Australian portfolio (40% of 2Q19 NPI) fell 11% y-o-y on the back of the depreciation of the AUD versus SGD and weakness of its Sydney properties which resulted in gross operating revenue (GOR) and gross operating profit (GOP) in AUD terms dropping 4.0% and 6.1% y-o-y respectively.
• Sofitel Sydney Wentworth and Frasers Suites Sydney were impacted by a more competitive market due to an increase in room supply.
• This was partially offset by Novotel Sydney Darling Square which benefited from a doubling of banquet revenue arising from an increase in conferences and events. Frasers Hospitality Trust’s other property outside Sydney, Novotel Melbourne on Collins, had a better quarter with RevPAR rising 3.4%.

Weaker banquet and margins hits Japanese operations

• Despite RevPAR for Frasers Hospitality Trust’s Crowne Plaza Kobe improving 0.4%, GOR and GOP for the Japan portfolio dropped 1.9% and 4.6% in JPY terms due to weaker F&B revenue and impact of higher utilities. Combined with a weaker JPY, 2Q19 NPI for Japan (9% of 2Q19 NPI) declined 31.9% y-o-y.

Challenging conditions remain in KL

• The Malaysian operations continue to be hampered by a weak KL market.
• RevPAR for Westin KL fell 7.4% y-o-y to MYR348 as corporate and group demand remains weak. This combined with generally softer banqueting demand resulted in F&B revenues falling 29.1% y-o-y.
• As a result, 2Q19 NPI (5% of NPI) from the Malaysian portfolio plunged 35.1% y-o-y.

Competition still an issue with Intercontinental Singapore

• RevPAR for the Singapore portfolio (25% of NPI) rose 2.2% y-o-y largely due to higher occupancies at Frasers Suites Singapore.
• However, with the nearby JW Marriott and Andaz hotels still in the process of ramping up occupancy, Frasers Hospitality Trust’s InterContinental Singapore property faced significant price competition which caused overall GOP for the Singapore portfolio to fall 0.7% y-o-y, which translated to a 1.2% y-o-y fall in NPI.

UK boosted by leisure demand

• Frasers Hospitality Trust’s UK portfolio (13% of NPI) we understand saw stronger leisure demand owing to a weaker GBP. This combined with the completion of renovations at the Ibis Styles London Gloucester Road property in February which saw 31% higher RevPAR, resulted in the UK operations delivering 13.2% uplift in 2Q19 portfolio RevPAR. This in turn led to NPI for the UK operations jumping 7.4% y-o-y.

Stable gearing

• Gearing was maintained at 34% with effective cost of debt inching higher to 2.6% from 2.5% at end 1Q19. The proportion of fixed rate debt was steady at 74%.
• Furthermore, Frasers Hospitality Trust guided that post the refinancing of S$385m debt due in July, it should be able to maintain its cost of debt around the 2.6% level. Post this refinancing, Frasers Hospitality Trust does not have any debt till 2022.
• Meanwhile, NAV per unit stood at S$0.76.

Lowering earnings estimates

• On the back of weaker cted 2Q19 results and expected declines in RevPAR in the Sydney portfolio due to supply pressures, partially offset by lower interest costs, we lowered our FY19-20F DPU by 11-13%.
• However, our DCF-based Target Price falls less from S$0.78 to S$0.77 as we roll forward our valuation base to FY20 and assume a lower cost of debt of 3.25% from 3.50% previously.
• A lower cost of debt assumption is due to our DBS economists now expecting zero rate hikes by the Federal Reserve versus four times previously.

Downgrade to HOLD With Revised Target Price of S$0.77

• Due to the weaker than expected 2Q19 results and limited upside to our revised Target Price of S$0.77, we downgrade our recommendation from BUY to HOLD.
• While we see near term pressure on Frasers Hospitality Trust’s DPU, we believe the potential sale of Sofitel Wentworth provides upside risk to Frasers Hospitality Trust’s NAV per unit which should mitigate any downside risk to Frasers Hospitality Trust’s share price.

Source: DBS Research - 3 May 2019