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.
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