Broker's take: DBS raises Frasers Hospitality Trust's target price to S$0.96

DBS Group Research on Tuesday raised the target price of hospitality stapled group Frasers Hospitality Trust (FHT) to S$0.96 a unit from S$0.95 previously, following the acquisition of Sofitel Sydney Wentworth in Australia.

As at 04:00pm, FHT was trading flat at around S$0.875 a unit.

On Monday, FHT announced its maiden acquisition with the purchase of 436-room Sofitel Sydney Wentworth for A$224 million (S$237 million), on an estimated initial net property income yield of between 6-6.5 per cent. The hotel will be leased to the master lessee, Frasers Centrepoint, FHT's sponsor, for an initial 20 years with an option to renew the lease for another 20 years.

"After imputing the proposed acquisition, we raised our discounted cash flow-based target price to S$0.96. With a projected total 12-month return of 17 per cent (10 per cent upside and 7.1 per cent yield), we reiterate our buy recommendation," DBS analysts said.

They added that they were positive on the acquisition given the increased exposure to the expanding Sydney market which is a beneficiary of growing tourist arrivals, new infrastructure projects such as the Barangaroo Development and Sydney International Convention Centre redevelopment, as well as a benign supply outlook.

"The health of the market can be seen by the 4.2 per cent growth in RevPAR (revenue per available room) registered in 2014. Post-acquisition, FHT's portfolio will expand from 12 to 13 properties, with its total exposure to Australia rising to 22.4 per cent from 11.3 per cent (by value)," the analysts said.

"Assuming a S$125 million equity raising at S$0.88 per unit and 40 per cent target gearing, we estimate 2 per cent upside to our FY16F DPU (distribution per unit) forecasts," they said.