Portfolio rejuvenation efforts kick off

  • FHT continues to look attractive from a valuation standpoint at 0.7x P/NAV on pandemic level valuations or -1 S.D from historical trading range
  • Near-term earnings gap expected from the divestment of Sofitel Sydney Wentworth but likely to be filled with capital top-ups in the interim
  • Estimate a 136% y-o-y growth in DPU on more conservative recovery profile
  • Maintain BUY, TP unchanged of S$0.65

Investment Thesis

Attractive entry price. Frasers Hospitality Trust (FHT) currently trades below book at a 0.7x P/NAV, below -1 standard deviation trading range and on 4.9% forward FY22 yields. We estimate a 136% y-o-y growth in DPU on a low base in FY21. 
Divestment of Sofitel Wentworth a temporary income gap, but capital top-ups likely in our view. The recent divestment of Sofitel Sydney Wentworth on a 12% premium to asset valuation will potentially go into partial debt repayment (from 42% to 34% gearing) and potentially capital top-ups in the coming years, to potentially offset the loss of income from the asset . Any near-term acquisitions will serve as upside to our conservative estimates. We have adjusted our estimates to account for softer projected normalisation of travel with  RevPAR at c.50% of 2019 levels in 2021.

 A privatisation candidate? Given the sponsor’s significant 62% stake in FHT and relative illiquidity vs peers, we believe that the stock remains an attractive takeover target, as it costs less than S$500m to take it private and gain control of its portfolio of c.4,000 room keys and landmark Singapore hotels.

Valuation:

Our DCF-based TP is S$0.65 on a reduction in income post divestment of Sofitel Wentworth. 

Where we differ:

No assumption of near-term acquisitions post Sofitel Wentworth divestment.  

Key Risks to Our View:

Omicron development causing a longer-than-expected delay to global border reopening.