Maybank Securities analyst Li Jialin, who is taking over coverage of Frasers Hospitality Trust (FHT) for the brokerage, has upgraded her call to “buy “ from “hold”, with a lower target price (TP) of 54 cents.
Li has lowered her dividend discount model (DDM) based TP to 54 cents from the previous target of 55 cents due to inflation and rising interest rates, with a 7% cost of equity (COE) and long-term growth of 3%.
The revised TP implies a target price-to-book value (P/Bv) of 0.8x the REI’s historical mean since 2019. FHT’s current P/Bv of 0.67x is around 1 standard deviation (s.d.) below the mean.
The analyst expects for the hospitality sector to see continued recovery in FY2023 with China’s reopening, returning to its pre-pandemic performance. Nonetheless, she has lowered Maybank’s FY2023 to FY2025 forecasts by around 0% to 13% to factor in FX volatility and inflation.
According to Li, the strong recovery seen in the hospitality sector underpinned FHT’s FY2022 ended December 2022 results. “Growth came on the back of strong performance during the summer peak season in the UK, partially offset by the Japan market,” she says.
She notes that FHT’s 2HFY2022 net profit interest (NPI) margin further crept up to 73.2% compared to 71.9% in 1HFY2022 and below 70% in FY2021, despite the labour crunch, inflation and utility pricing hikes.
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The Singapore market saw a 50% and 63% y-o-y increase in full-year gross operating revenue (GOR) and gross operating profit (GOP) respectively, led by strong recovery in hotel performance, says Li,
For the full-year period, a robust rebound in GOR was also seen in Malaysia and the UK, with each territory posting more than 100% growth y-o-y, and Germany, which saw y-o-y growth of 82%, underpinned by strong performances in 2HFY2022.
Li notes that Japan is ready to “catch up”, although its market recovery slowed in 2HFY2022. Japanese GOP was down 10% h-o-h in 2HFY2022 against a strong full-year GOP growth of 82% y-o-y, mainly due to higher operating expenses.
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Meanwhile, Australia's GOP in FY2022 is just shy of its FY2021 performance, down 5% y-o-y, owing to the divestment of Sydney Sofitel Wentworth completed in April 2022.
The analyst believes that strong average daily rate (ADR) growth in all markets supported the rebound in revenue per available room (RevPAR) of some 38% to 100% growth.
“Nonetheless, RevPAR is still shy of pre-pandemic levels across all markets. We roll forward our forecasts to FY2025, factoring in an across-the-board improvement in occupancy (10% to 25%) and room rates (5% to 15%) in FY2023, on the back of relaxed outbound travel restrictions in China,” writes Li.
FHT’s gearing further declined to 36.4% compared to 42.3% in 1HFY2022, with total borrowings of $757 million, down from $854 million in 3QFY2022. COD crept up 10 basis points (bps) to 2.3% with around 82% of debt on fixed rates, while interest expenses rose 5% y-o-y to $11.6 million.
She adds that the valuation exercise conducted by FHT in September last year saw a 3% average increase in asset values in local currency, offset by a strong SGD. “Following its failed privatisation in September, there will be a 12-month period before the sponsor can revisit privatisation again,” notes Li.
“Despite challenges from rising interest rates, inflation and FX volatility, the management is looking for accretive deals for inorganic growth. In the medium term, potential rebranding of assets that are currently under hotel management contracts expiring in a few years will be the focus area for growth,” she says.
As at 10.45am, units in FHT were trading flat at 48 cents.
