Frasers Hospitality Trust

Transcription

1 Singapore Company Guide Version 6 Bloomberg: FHT SP Reuters: FRHO.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 8 Feb 2017 BUY Last Traded Price ( 7 Feb 2017): S$0.665 (STI : 3,071.64) Price Target 12-mth: S$0.75 (12% upside and 7.7% yield) (Prev S$0.75) Potential Catalyst: Acquisitions/better-than-expected results Where we differ: Below consensus on lower revenues Analyst Mervin SONG CFA mervinsong@dbs.com Derek TAN derektan@dbs.com What s New Normalised 1Q17 DPU down 19% y-o-y due to recent rights issue but beats rights issue forecasts Underlying NPI up 16% y-o-y due to acquisition of Novotel Melbourne and Maritim Hotel Dresden Upside to DPU from deploying strong balance sheet with gearing only at 33.7% Price Relative Forecasts and Valuation FY Sep (S$m) 2015A 2016A 2017F 2018F Gross Revenue Net Property Inc Total Return Distribution Inc EPU (S cts) EPU Gth (%) (69) (6) DPU (S cts) DPU Gth (%) 4 (10) (3) 4 NAV per shr (S cts) PE (X) Distribution Yield (%) P/NAV (x) Aggregate Leverage (%) ROAE (%) Distn. Inc Chng (%): 0 0 Consensus DPU (S cts): Other Broker Recs: B: 2 S: 1 H: 0 Hospitable outlook Enhance liquidity to boost investor interest. We maintain our BUY call on (FHT) with a TP of S$0.75. While FHT has a portfolio of quality of hotels in key gateway cities and has a successful acquisition track record such as the purchase of Sofitel Sydney Wentworth, investor interest at times has been muted. We believe the increased free float post the recent rights issue should help allay investor concerns about its trading liquidity, thereby compressing FHT s yield over time. In the meantime, FHT offers an attractive 7.7% yield with earnings upside from acquisitions. Gearing up for opportunities. While there is near-term dilution from its recent pre-emptive rights issue, FHT is now in a strong position to pursue acquisition opportunities as its gearing stands at 33-34%. These acquisitions could arise from third parties but also from the clear and visible pipeline from its sponsor (Frasers Centrepoint Limited) and strategic partner (TCC Group). FHT has first right of refusal (ROFR) over 17 hotels and serviced residences located across Asia, Australia and Europe. Exposure to growing markets with near-term boost from recent acquisitions. Approximately 55% of FHT s 1Q17 net property income (NPI) is sourced from the growing markets of Australia (40%) and Japan (15%). FHT s Australian and Japanese properties over the medium term are beneficiaries of the growing number of foreign tourists. Beyond this, FHT should also benefit from the recent acquisitions of Maritim Hotel Dresden in Germany and Novotel Melbourne in Australia. Valuation: We maintain our DCF-based TP at S$0.75. With 12% capital upside and 7.7% yield we reiterate our BUY call. Key Risks to Our View: FX volatility. A key risk to our positive outlook is a significantly weaker AUD, MYR, JPY, GBP and EUR as Australia, Malaysia, Japan, UK, and Germany contributed c.74% of FHT s 2016 net property income. At A Glance Issued Capital (m shrs) 1,836 Mkt. Cap (S$m/US$m) 1,221 / 861 Major Shareholders (%) TCC Hospitality 28.5 Fraser & Neave 22.3 Free Float (%) m Avg. Daily Val (US$m) 0.33 ICB Industry : Financials / Real Estate Investment Trusts Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P. ed: TH / sa: YM, PY

2 WHAT S NEW Boost from Melbourne and Dresden Negative drag from recent rights issue Similar to 4Q16, DPU for 1Q17 was impacted by the dilution from the pre-emptive recent rights issue (27% increase in the number of shares on issue) to raise liquidity in the stock and to partially fund the acquisition of Novotel Melbourne. This resulted in normalised 1Q17 DPU falling 19% y-o-y (adjusting 1Q16 DPU for the rights issues) to Scts which was in line with our expectations. However, compared to forecasts at the time of the rights issue and announcement of the acquisition of Novotel Melbourne, 1Q17 DPU was 6% higher than FHT s estimates due to better-than-expected performance of the Sydney properties and earlier completion of Novotel Melbourne. Meanwhile, underlying NPI grew 16% y-o-y to S$30.5m as FHT benefitted from the acquisitions of Novotel Melbourne and Maritim Hotel Dresden. The higher NPI was also attributed to the better performance of FHT s Sydney hotels and ANA Crowne Plaza Kobe which helped offset the weaker contribution from the operations in Singapore, UK and Malaysia. Core Australian portfolio delivers 1Q17 NPI from FHT s Australian portfolio (40% of 1Q17 NPI) grew 43% y-o-y primarily due to the contribution from the recently acquired Novotel Melbourne. However, FHT s existing properties also did well, with RevPAR excluding Novotel Melbourne rising 8% y-o-y to A$246. The improvement in RevPAR was boosted by both increases in average daily rate (ADR 1Q17: A$261 versus 1Q16: A$244) and occupancy (1Q17: 94.2% versus 1Q16: 93.6%) as FHT s operations benefitted from a busy events calendar. The Sydney properties saw an uplift post the completion of the International Convention Centre with RevPAR up 7.9% y-o-y. Recovery in Singapore operations continues Despite the known headwinds of increased new room supply and weakness in corporate demand from the oil & gas and banking sectors, NPI contribution from Singapore rose 4% y-o-y (20% of 1Q17 NPI). This was mainly attributed to Intercontinental Singapore having a full room inventory post the completion of renovations which resulted in overall Singapore portfolio occupancy rising to 81.3% from 74.5% in 1Q16 and RevPAR increasing 6% y-o-y to S$244. This was despite ADR dropping marginally to S$300 from S$309 in the preceding quarter. The overall RevPAR performance for the Singapore operations was however partially negated by falls in RevPAR for Frasers Suites Singapore which continues to be impacted by weak market conditions in Singapore. Stronger Japanese operations 1Q17 NPI for FHT s Japan operations (15% of 1Q17 NPI) rose 12% y-o-y, on the back of (1) a stronger JPY, (2) focus on ADR (11% increase to JPY15,801) to compensate for a weaker occupancy (1Q17: 77.6% versus 1Q16: 83.6%) which was caused by a decline in international arrivals into the Kansai region, and (3) cost containment which resulted in GOP increasing by 2% y-o-y. Fall in contribution from UK and Malaysia Owing to the fall in GBP versus SGD and 3% y-o-y dip in gross operating profit (GOP) falling due to the impact of a 3% increase in the minimum wage, 1Q17 NPI from the UK operations fell 22% y-o-y (14% of NPI). This was despite underlying RevPAR being stable at GBP97. The uplift in occupancy (1Q17: 86.8% versus 1Q16: 81.5%) offset the falls in ADR (1Q17: GBP112 versus 1Q16: GBP119). Meanwhile, NPI from Malaysia was down 21% y-o-y (6% of NPI), largely on account of a weaker MYR and 20% decline in GOP on account of weaker banquet revenues. Underlying RevPAR was stable at MYR391, with a 6% decline in ADR to MYR523 offset by higher occupancies (1Q17: 74.9% versus 1Q16: 69.9%), as the Westin Kuala Lumpur benefitted from stronger transient and corporate demand outside the oil & gas industry. Page 2

3 Balance sheet ready for opportunistic acquisitions Following the recent pre-emptive right issue (32 rights stapled securities for every 100 existing stapled securities), FHT s gearing has now settled at 33.7%. We believe this provides significant balance sheet capacity to pursue opportunistic acquisitions. FHT s effective cost of debt was relatively stable at 2.6%, with 87.8% of borrowings on fixed rates. NAV per unit now stands at S$0.745, down from S$0.829 at end-4q17 on account of the increase in the number of shares post the recent rights issue. Maintain BUY with TP of S$0.75 With 1Q17 results in line with expectations, we maintain our BUY recommendation with a TP of S$0.75. In our view, FHT offers an attractive 7.7% yield with further upside should it deploy its strong balance sheet. Quarterly / Interim Income Statement (S$m) FY Sep 1Q2016 4Q2016 1Q2017 % chg yoy % chg qoq Gross revenue Property expenses (5.1) (4.9) (9.0) Net Property Income Other Operating expenses (3.5) (3.5) (8.1) Other Non Opg (Exp)/Inc 3.60 (0.6) N/A Net Interest (Exp)/Inc (4.7) (5.0) (4.3) Exceptional Gain/(Loss) Net Income Tax (1.4) (13.3) (1.3) (8.7) (90.5) Minority Interest Net Income after Tax Total Return (24.5) (44.2) Non-tax deductible Items (1.7) nm nm Net Inc available for Dist Ratio (%) Net Prop Inc Margin Dist. Payout Ratio Source of all data: Company, DBS Bank Page 3

4 CRITICAL DATA POINTS TO WATCH Net Property Income and Margins (%) Earnings Drivers: Leasing structure provides downside protection. Through the fixed rental component of the master lease agreements with its sponsor, FHT s downside is protected in the event of large external shocks such as SARS and volatility in the underlying hospitality markets. Fixed rentals represent 44% of FHT s revenues. Medium upside from renovations at InterContinental Singapore. FHT recently completed a S$26m renovation of InterContinental Singapore. The project involved: (1) refurbishment of the public space including F&B areas and gymnasium, and (2) renovation of rooms as well as the addition of four rooms which took the total room count to 410. Following the repositioning of the hotel to a more contemporary and up-market position, we expect a boost in average daily rates (ADRs) but this will be slower than earlier anticipated due to the softness in the Singapore hospitality market. In addition, FY17 will be the first year since listing where InterContinental Singapore will have its full inventory available for sale. Expect continued strength from Australia. We expect the strong performance from Australia to continue going forward. The Australian hospitality market has benefitted from a growing number of international visitors which rose by 11% for 11M16. According to industry consultants, this should translate into RevPAR growth of 3-5% in the coming year. Medium-term growth outlook still positive for Japan. We remain positive on the medium-term outlook for FHT s Japanese property, ANA Crown Plaza Kobe. This is premised on relaxation of visa requirements by the Japanese government, close proximity to China which is a growing outbound market, and increased interest ahead of the Tokyo 2020 Olympics. Near-term headwinds from Malaysia, Singapore and UK. While a large proportion of FHT s markets are on the rise and its main property in Singapore, InterContinental Singapore ramps up following the completion of its renovations in February this year, the REIT faces some headwinds from the slowing Kuala Lumpur and Singapore hospitality markets. Nevertheless, overall exposure to Westin Kuala Lumpur and Frasers Suites Singapore is contained at around 10% of group NPI respectively. In addition, FHT s London hotels have the challenge of navigating a potential period of weaker demand post Brexit. Net Property Income and Margins (%) Distribution Paid / Net Operating CF Interest Cover (x) Source: Company, DBS Bank Boost from recent acquisitions. FHT recently acquired the 328- room Maritim Hotel Dresden, Germany and 380-room Novotel Melbourne, Australia. The full-year contribution from these two hotels should help mitigate any potential weakness at its Malaysian, Singaporean or UK operations. Page 4

5 Balance Sheet: Low gearing. Following FHT s pre-emptive rights issue, its gearing is expected to settle at 33-34%. This provides significant debt headroom to pursue further acquisitions. Over the medium term, however, we expect FHT s gearing to stabilise at 38-40% which is the optimal level from management's perspective given its regional exposure. Share Price Drivers: Investors realising FHT is not a pure Singapore play. FHT s share price has corrected significantly in line with other hospitality REITs as investors have turned more cautious on the outlook for the Singapore hospitality market. However, we believe investors have thrown the baby out with bath water as FHT s main exposure is the growing markets of Australia and Japan. In addition, InterContinental Singapore, FHT s main Singapore asset completed its extensive AEI programme in February 2016, which should enable FHT to partially insulate itself against headwinds in Singapore. Earnings upside from deploying strong balance sheet. Following FHT s recent pre-emptive rights issue, FHT is now in a strong position to pursue acquisition opportunities as its gearing should fall to c.34%. These acquisitions could arise from third parties but also from the clear and visible pipeline from its sponsor (Frasers Centrepoint Limited) and strategic partner (TCC Group). FHT has first right of refusal (ROFR) over 17 hotels and serviced residences located across Asia, Australia and Europe. Aggregate Leverage (%) ROE (%) Distribution Yield (%) Key Risks: Interest rate risks. Any increase in interest rates will result in higher interest payments which will reduce the income available for distribution. To mitigate this risk, FHT has fixed c.88% of its debt. Foreign currency risks. Exposure to multi-currency earnings (GBP, AUD, JPY and MYR) could lead to DPU volatility as DPU is paid in SGD. Hospitality sector is a volatile business. Exposure to volatility in regional economies and seasonal factors could affect the performance of the assets located in different countries. FHT manages this risk by having a diversified portfolio. PB Band (x) Company Background (FHT) is a hospitality stapled group comprising FH-REIT and FH-BT. FH-REIT is a Singapore-based REIT which invests in hospitality assets, while FH-BT is a Singapore-based business trust which will be dormant as of the Listing Date. FHT operates 14 mid- and upper-scale hotels and serviced residences in key gateway cities located in Singapore, Japan, UK, Germany, Australia, and Malaysia. Source: Company, DBS Bank Page 5

6 Income Statement (S$m) FY Sep 2014A 2015A 2016A 2017F 2018F Gross revenue Property expenses (18.7) (23.0) (19.4) (28.7) (29.6) Net Property Income Other Operating expenses (11.3) (20.8) (14.9) (18.6) (19.1) Other Non Opg (Exp)/Inc 0.0 (30.7) (11.3) Net Interest (Exp)/Inc (11.7) (17.5) (18.8) (21.1) (23.0) Exceptional Gain/(Loss) Net Income Tax (5.7) (18.0) (16.6) (9.8) (10.4) Minority Interest Preference Dividend Net Income After Tax Total Return Non-tax deductible Items 16.2 (41.7) Net Inc available for Dist Growth & Ratio Revenue Gth (%) (0.2) 26.1 (4.0) N Property Inc Gth (%) (1.9) 26.8 (1.4) Net Inc Gth (%) (3.3) (65.6) Dist. Payout Ratio (%) Net Prop Inc Margins (%) Net Income Margins (%) Dist to revenue (%) Managers & Trustee s fees ROAE (%) ROA (%) ROCE (%) Int. Cover (x) Source: Company, DBS Bank Driven mainly from the acquisitions of Maritim Hotel Dresden and Novotel Melbourne, positive RevPAR growth from FHT s Sydney properties as well as Intercontinental Singapore having full inventory for sale Page 6

7 Quarterly / Interim Income Statement (S$m) FY Sep 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 Gross revenue Property expenses (5.1) (4.8) (4.7) (4.9) (9.0) Net Property Income Other Operating expenses (3.5) (4.1) (4.3) (3.5) (8.1) Other Non Opg (Exp)/Inc 3.60 (2.1) (13.5) (0.6) 10.4 Net Interest (Exp)/Inc (4.7) (4.8) (4.3) (5.0) (4.3) Exceptional Gain/(Loss) Net Income Tax (1.4) (0.2) (1.7) (13.3) (1.3) Minority Interest Net Income after Tax Total Return Non-tax deductible Items (1.7) Net Inc available for Dist Growth & Ratio Revenue Gth (%) 2 (14) N Property Inc Gth (%) 3 (16) Net Inc Gth (%) nm (45) (71) Net Prop Inc Margin (%) Dist. Payout Ratio (%) Balance Sheet (S$m) FY Sep 2014A 2015A 2016A 2017F 2018F Investment Properties 1,672 1,960 2,058 2,297 2,302 Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets 1,692 2,032 2,161 2,436 2,442 ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Unit holders funds 982 1,172 1,244 1,507 1,507 Minority Interests Total Funds & Liabilities 1,692 2,032 2,161 2,436 2,442 Non-Cash Wkg. Capital (5.7) (20.2) Net Cash/(Debt) (657) (733) (746) (720) (726) Ratio Current Ratio (x) Quick Ratio (x) Aggregate Leverage (%) Z-Score (X) Source: Company, DBS Bank Gearing to settle at 33-34% post the recent rights issue Page 7

8 Cash Flow Statement (S$m) FY Sep 2014A 2015A 2016A 2017F 2018F Pre-Tax Income Dep. & Amort Tax Paid 0.0 (0.1) (3.0) (9.8) (10.4) Associates &JV Inc/(Loss) Chg in Wkg.Cap. (0.8) (8.6) (1.3) Other Operating CF Net Operating CF Net Invt in Properties (23.1) (1,918) (127) (238) (4.7) Other Invts (net) Invts in Assoc. & JV Div from Assoc. & JVs Other Investing CF Net Investing CF (23.1) (1,918) (127) (238) (4.7) Distribution Paid (70.9) (71.0) (63.6) (94.7) (99.5) Chg in Gross Debt New units issued 0.0 1, Other Financing CF 0.0 (13.3) 79.7 (4.5) (4.5) Net Financing CF (60.9) 1, (99.2) Currency Adjustments Chg in Cash (11.1) (1.3) Includes acquisitions of Maritim Hotel Dresden and Novotel Melbourne Operating CFPS (S cts) Free CFPS (S cts) 4.07 (133) (1.3) (8.3) 5.24 Source: Company, DBS Bank Target Price & Ratings History Source: DBS Bank Analyst: Mervin SONG CFA Derek TAN Page 8

9 DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 8 Feb :13:05 (SGT) Dissemination Date: 8 Feb :39:00 (SGT) GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. 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