SINGAPORE (Nov 1): Analysts believe signs of a bottoming out of Singapore’s hospitality sector could bode well for Frasers Hospitality Trust (FHT), despite continued weakness in Australia.
FHT saw its full-year distribution per stapled security (DPS) fall 7.3% to 4.4129 cents for FY19, from DPS of 4.7613 cents a year ago.
The decline was partly due to an absence of a one-off tax provision write-back recognised in 4Q18, and also due to weaker performances from Australia and Malaysia.
However, the Singapore properties turned the corner with a 1.3% improvement in revenue per available room (RevPAR) in FY19, on the back of higher occupancy rates and improvements in average daily rates (ADR).
See: Frasers Hospitality Trust posts 4.1% decline in 4Q DPS to 1.1655 cents on absence of one-off gain
Chua Su Tye, an analyst at Maybank Kim Eng Research, notes that FHT’s Singapore recovery is intact as the Singapore assets witnessed a turnaround in 4Q19.
“We believe that competitive supply pressures in the Bugis micro-market have subsided, and pencil in a 3-5% RevPAR improvement over FY20-21, to be further strengthened by easing supply,” Chua says.
And analysts at DBS Group Research agree that the improving Singapore hospitality sector will “lead the way” forward for FHT.
“Going forward, the high occupancy rate and further improvement in ADR would lead to higher RevPAR. With the UK and Japan portfolios stabilising, improvement in the Singapore portfolio will lead earnings,” was lead analyst Derek Tan.
Maybank is keeping its “buy” call on FHT with an unchanged target price of 80 cents, while DBS has a “hold” recommendation on FHT on a target price of 78 cents.
Chua notes that FHT offers “undemanding valuations” as it is currently trading at a FY19E price-to-book value (P/BV) of 0.9 times – the lowest among its peers.
The analyst also opines that FHT has potential to re-rate on acquisitions, backed by a strong balance sheet and its sponsor’s growing assets under management.
“Its balance sheet remains strong at 35.1% leverage with average cost of debt at 2.5%,” Chua says. According to Chua, FHT is “eyeing expansion opportunities” from both its sponsor’s right-of-first-refusal (ROFR) assets and third-party deals.
DBS’ Tan notes that FHT had ROFR over 17 hotels and serviced residences located across Asia, Australia, and Europe.
“FHT is now in a strong position to pursue acquisition opportunities given its current gearing of close to 35.1%, which provides upside to our earnings,” says Tan.
However, Tan says FHT could also see a “surprise” potential catalyst in Australia.
“The weak AUD may attract more holiday makers to Australia towards the end of the year and improve occupancy in Sydney and Melbourne. There may be a surprise from the Australian portfolio given its prime location and competitive rates,” he says.
As at 4.12pm, units in Frasers Hospitality Trust are trading half a cent lower at 73 cents. According to DBS valuations, this implies an estimated price-to-net asset value (P/NAV) of 1.0 times and a distribution yield of 5.7% for FY20F.
