Felicia Tan Mon, Jun 13, 2022
Maybank Securities analyst Chua Su Tye has advised investors to accept Frasers Hospitality Trust’s (FHT) privatisation offer.
On June 13, Frasers Property (FPL) and the manager of FHT announced that they were seeking to privatise the hospitality trust via a scheme of arrangement with an offer of 70 cents to FHT’s stapled security holders.
FPL is the sponsor of FHT.
The 70-cent offer per unit will be paid fully in cash as a result of a strategic review announced on April 8.
The offer price should return some 23% to IPO investors, and unitholders to exit at premiums of between 6% to 52%, notes Chua.
He adds that the privatisation offer comes ahead of an uneven recovery for FHT’s distribution per unit (DPU) amid rising macro headwinds.
To Chua, FHT’s growth trajectory for its revenue per available room (RevPAR) remains uneven despite the improving sector fundamentals and tailwinds from the reopening of borders.
“FHT’s net asset value (NAV) has fallen by 22% while DPU declined 87% since its FY2016 IPO, even as it closed $565 million of acquisitions and $60 million in asset enhancement initiatives (AEIs) to deliver 35% assets under management (AUM) growth,” he writes.
“While management cited headwinds from inflationary pressures, rising interest rates, and to a lesser extent, likely weakening of its operational currencies against [the] Singapore dollar (SGD), we forecast 36% 3-year DPU CAGR through FY2024, implying a 3.1% FY2023 DPU yield, as NAV rises at 4%,” he adds.
Furthermore, FHT, which ranks among the smallest Singapore REITs (S-REITs) by market cap and is the smallest hospitality S-REIT, has a lack of scale that limits its AUM growth.
“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,” the analyst says.
“A sale of its platform to FPL could accelerate capital recycling of its well-placed hospitality assets, ahead of management’s other strategic options,” he adds.
On the offer, Chua sees the consideration as having factored in the REIT’s recovery prospects.
“[The offer] values FHT at 1.07x P/NAV, against its 0.86x average multiple since IPO, 1.04x for precedent S-REIT privatisations, and 0.9x for its peers,” he says. “It is at a 44% premium to the 12-month VWAP and 6% above its closing price (on June 8).”
The transaction will require a 75% approval from unitholders at an extraordinary general meeting (EGM), which is expected to take place in early September.
If successful, FHT will be delisted in the 4QFY2022.
“We think completion risk is low, given the attractive valuation, which is at 27% above our [target price] of 55 cents,” says Chua.
Units in FHT closed 3 cents higher or 4.55% up at 69 cents on June 13.