Frasers Centrepoint Ltd - Growing footprint in UK

FCL has purchased a portfolio of Malmaison and Hotel du Vin hotels in the UK for c.£364m (S$760m). This would double the group’s European footprint to 4,000 rooms and boost its hospitality exposure to 13% of total assets. We see this acquisition as strategic as it would expand FCL’s reach into the UK tourist market as well as the premium tourist segment with potential to tap new markets in Asia as well as new clientele networks. We estimate the purchase could boost FCL’s earnings by a marginal 1-5% with further upside potential from a visible acquisition pipeline. Maintain Add with an unchanged target price of S$2.02 (30% discount to RNAV).

What Happened
FCL announced the purchase of the Malmaison and Hotel du Vin portfolio of 29 upscale boutique lifestyle hotels in the UK for £363.4m (S$760m; or over 7.5% cap rate) from KSL Capital Partners. Malmaison has upscale boutique heritage hotels situated in iconic buildings such as Malmaison Oxford and the historic Malmaison Dundee. Hotel du Vin operates luxurious lifestyle hotels housed in historic buildings including Hotel du Vin Bristol and Hotel du Vin Wimbledon. This adds 2,082 rooms and doubles FCL’s footprint in Europe to c.4,000 keys. The hotels have enjoyed healthy average occupancy rates of over 80% over the past three years. In addition, there is an immediate pipeline of two hotels with 319 rooms in Aberdeen and Stratford-upon-Avon. FCL will fund this purchase with debt facilities and internal resources.

What We Think
We see the acquisition as strategic as it will increase FCL’s leverage into the key UK tourist market, which saw a 3.7% CAGR over the past four years, via a strong and scalable platform. It will expand the group’s hospitality footprint to 21,144 keys, and it is on track to hit 30,000 rooms by FY19. It will extends the group’s reach into the premium tourist market with potential to introduce these brands into Asia as well as tap into these new networks. In addition, the present management has a strong track record and has identified a pipeline of conversion and asset enhancement opportunities. This will enable FCL to benefit from higher returns in the longer term. 

In terms of impact, we believe the portfolio could increase the group’s hospitality AUM by 51% to S$2.2bn, bringing this segment to 13% of total assets. We estimate these contributions could boost earnings slightly by c.1-5%, but will be RNAV neutral in the near term. The purchase would increase the group’s debt-to-equity ratio to 0.92x from 0.84x previously. While this ratio is higher than comparable peers, we believe potential capital recycling would enable the group to bring it down.


Technical Analysis
Daily Chart
What You Should Do
We maintain an Add rating as the stock is trading at a 38% discount to RNAV of S$2.88. It offers 12% upside to our RNAV-based target price of S$2.02. (Read Report)

Source : CIMB Research

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