Excerpts from DBS report
Analyst: Derek Tan
The next privatisation candidate
• Cost to privatise FEHT (Far East Hospitality Trust) and FHT (Frasers Hospitality Trust) is cheaper than the latest land price for a hotel site in Singapore • FY20F earnings cut by c.40%, but a recovery when it happens will be swift • Upgrade FEHT and FHT to BUY, pick ART for recovery |
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| Trading below replacement cost; are hotel S-REITs the next privatisation candidates? |
The four Singapore hospitality focused S-REITs have borne the brunt of the sell-off from the COVID-19 outbreak since late Feb’2020 and are now trading at 0.5-0.6x P/NAV, at -2 standard deviation (SD) of their 10-year mean.
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Reason to Privatise |
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On an enterprise value (EV)/room basis, we found all four S-REITs trade at an implied valuation/room of S$0.5-1.2m/room, with CDLHT and FEHT the lowest at <S$0.6m/room.
This is even cheaper than recently transacted land costs for hotel sites in recent years.
| Outlay to privatise FHT and FEHT to cost less than latest land cost for a hotel site in Singapore. |
Among the four hotel SREITs, FHT and FEHT could be attractive privatisation candidates as they have been least active in tapping capital since listing.
We estimate that it will cost the Sponsors c. S$450m-600m to buy out the minorities, assuming a 25% premium to current price.
While the amount may sound hefty in the current climate, this compares favorably to the S$562m paid for the hotel site in Club Street in Singapore in Jan’19.
The Sponsors of FHT and FEHT will then gain control of a diversified portfolio of 3,000 rooms (FEHT) and 4,000 rooms (FHT), which will return higher when operating conditions improve.
We upgrade FEHT and FHT to BUY, and revise TPs to S$0.60 and S$0.65 respectively. 
Intercontinental Hotel Singapore (406 rooms) is one of the 15 hotels in 6 countries under the Frasers Hospitality Trust. Photo: Company
| A swift recovery when global lockdown lifts, earnings normalisation from FY21F. |
We have adjusted our portfolio valuation estimates across the hospitality S-REITs to factor in a sharp decline in global travel demand in FY20F.
Yields are largely supported by fixed rents for master leases, which are mainly payable by the Sponsors.
Our estimates are conservative, assuming more than two years for operations to normalize.
Our RevPAR estimates for FY20/21F are 47%/ 88% of FY19 levels before rebounding back from FY22F onwards.
The hotel S-REITs are trading at c.7%-8% FY21F yields. Our pick is ART (BUY, TP S$1.10) to leverage on the global recovery.
Risks: Prolonged travel shutdown due to COVID-19 outbreak.
Full report here.
