SINGAPORE (July 20): UOB Kay Hian is initiating coverage with a “buy” call on Singapore-based REIT Frasers Hospitality Trust (FHT) with a target price of 58 cents on the resumption of domestic travel.

Analysts Nicola Ho and Jonathan Koh are positive on the REIT as its operations are expected to recover in the coming months due to the opening of domestic borders across the nine key gateway cities it has exposure to, in Asia, Australia, and Europe.

“We see potential for recovery in domestic travel in Australia and the UK. In particular, the UK will establish travel corridors, which will usher in tourists, especially from continental Europe,” they write in a report dated July 16.

Frasers Hospitality Trust is expected to post an EBITDA of $42.4 million for FY2020F ending Sept 30, less than half the $91 million figure of the preceding year. 

The hospitality stapled group operates in six countries, namely Singapore, Australia, the UK, Japan, Malaysia and Germany, with its properties managed by names such as InterContinental Hotels Group, AccorHotels and Marriott International. 

UOB Kay Hian is optimistic that the company’s sponsor-backed fixed master lease structure will shelter it from the storm. “Fixed rents will continue to come from FHT’s sponsor-backed master leases on 13 of its properties… FHT’s balanced portfolio captures the demand for short-term stay from their hotels as well as long-term stay from their serviced residences.”

“This income structure over most of FHT’s portfolio provides for minimum rent and downside protection, which shelters FHT from the full impact of the pandemic. Fixed rents are estimated at $53 million for FY2019, which represents 35% of total gross revenue,” note the analysts.

UOB Kay Hian forecasts a DPU of 1.97 cents for FY2020 and a rise to 2.78 cents for FY2021. For 2QFY2020 ended March 2020, FHT declared a distribution per stapled security (DPS) of 0.3137 cents, down 68.1% y-o-y. This brings FHT’s DPS for 1HFY2020 to 1.6438 cents, down 26.6% y-o-y.

FHT also provides “attractive distribution yields” of 4.3% for FY2020 and 6.1% for FY2021, say the analysts.

Gradual reopening

In Australia, the government aims to complete the three phases to reopen the economy by July. New South Wales and Victoria lifted restrictions on interstate travel on June 1, while Queensland reopened its borders on July 10, followed by South Australia on July 20. 

In time for the school holidays, Qantas and Jetstar have cut airfares and ramped up domestic flights in July, though domestic travel suffered a temporary setback when Melbourne re-entered a six-week lockdown on July 7, owing to a spike of 191 cases that day.  

“Nevertheless, Frasers Hospitality Trust’s (FHT) three hotels in Sydney, Novotel Sydney Darling Square, Sofitel Sydney Wentworth and Fraser Suites Sydney, will benefit from the recovery in domestic travel, which accounted for 74.5% of all visitations to Sydney in the year ending June 2019,” say analysts. 

In the UK, hotels, pubs and restaurants have welcomed guests since Jul 4. Domestic travel has recovered gradually since households have been allowed to go on day trips by driving since May.

Budget airlines like EasyJet and Ryanair have increased capacity for domestic and international flights. The government is finalising a series of travel corridors where international arrivals need not self-isolate. This will pave the way for a return of tourists, especially from continental Europe, in 2H2020. That said, analysts warn of the near-term impact from Brexit, expected to occur in 2020. 

At home, visitor arrivals to Singapore dropped 85% y-o-y- in March, hitting a historical low of 748 arrivals in April. The hospitality industry is banking on staycations as a temporary reprieve to the drastic fall in tourism during phase 2 of the country’s reopening. Hotels can now apply to Singapore Tourism Board to resume providing accommodation for leisure purposes. 

For the Singapore portfolio, fixed rents of $15.7 million per year represented 50.3% of gross revenue from Singapore in FY2019, notes UOB Kay Hian. 

As at 12.12pm, units in Frasers Hospitality Trust are trading at 0.5 cents lower, or 1.09% down, at 45 cents.