Frasers Property’s bid to privatise Frasers Hospitality Trust does nothing for offeror’s minorities

[SINGAPORE] Minority investors of Frasers Hospitality Trust (FHT) are getting a second chance to exit their holdings by way of a privatisation offer.

FHT’s sponsor Frasers Property recently proposed privatising the stapled group at S$0.71 per stapled security via a trust scheme of arrangement. In September 2022, Frasers Property’s earlier attempt to privatise FHT at S$0.70 per stapled security narrowly failed to get requisite support from minority stapled securityholders.

Frasers Property’s latest offer price is at a 10.7 per cent premium to FHT’s end-March net asset value (NAV) per stapled security of S$0.6416. 

The offer price represents an 18.3 per cent, 25.4 per cent and 36.3 per cent premium to the last-transacted, three-month and 12-month volume-weighted average price prior to Apr 23, respectively, when the boards of FHT’s managers announced the managers were conducting a review of FHT’s strategy.

Various reasons were cited as rationale for the proposed privatisation, including macroeconomic headwinds and FHT’s smaller scale relative to its peers.

Also, despite revenue per available room at FHT’s assets recovering to pre-Covid levels, inflationary cost pressures and other macroeconomic challenges have constrained meaningful distribution per stapled security (DPS) growth.

Frasers Property’s perspective

However, while FHT’s minority investors are being given what looks to be a financially attractive offer, spare a thought for Frasers Property’s minority shareholders.

Spending resources in trying to privatise FHT, which made its trading debut in 2014, may not help improve Frasers Property’s financial or share price performance.

Frasers Property is facing macroeconomic headwinds while it has net debt of S$15.1 billion and net debt/total equity of 88.5 per cent as at end-March. Should it be raising its investment in FHT’s portfolio of hospitality assets, whose prospects are challenging, when the property group ought to work harder to reduce leverage given a tough economic climate?

FHT owns hotels and serviced residences in Singapore, Malaysia, Australia, Japan, UK and Germany.

For the six months ended Mar 31, FHT’s net property income declined 2.5 per cent from the year before because of elevated property taxes, utility costs driven by inflation and other property-related expenses. Due to lower net property income and higher finance costs, the trust’s DPS fell 6 per cent year on year. 

Can Frasers Property, which is active across various business lines, find better ways to deploy its capital than investing more in FHT? The stapled group owns various overseas assets in countries whose currencies may depreciate further against the Singapore dollar. Moreover, Frasers Property loses valuable recurring management fees from managing FHT should it be privatised.

Importantly, Frasers Property is trying to privatise FHT at a premium to book value, when the group itself trades way below book value. As at Monday (May 26), Frasers Property traded at a discount of 66 per cent to its end-March NAV per share of S$2.38.

In short, equity market investors implicitly apply a hefty discount to Frasers Property’s hospitality assets – potentially all of FHT’s assets plus other hospitality ones that the group owns outside of FHT.

Herein lies the critical need for Frasers Property’s board of directors to clearly articulate what it plans to do with the FHT portfolio and its other hospitality assets.  

Perhaps, Frasers Property can increase the pace of selling hospitality assets. The group recently completed the divestment of Capri by Fraser in Barcelona, Spain. Last year, Tuan Sing bought Fraser Residence River Promenade, a serviced apartment development with 72 units, three conservation warehouses and 47 car park lots, located at Jiak Kim Street, from Frasers Property for S$140.9 million.

Private fund option

Can Frasers Property do better holding its hospitality assets in private funds compared with listed trusts? Possibly, private funds may value the group’s hospitality assets more richly than the listed space.

Maybe, Frasers Property can bundle its hospitality assets to sell to a private fund which the group holds a minority stake in and manages, based on latest independent asset valuations. In this way, Frasers Property lightens its balance sheet, earns management fee income and improves return on equity.

Besides being FHT’s sponsor, Frasers Property is a sponsor of Frasers Centrepoint Trust and Frasers Logistics & Commercial Trust (FLCT), which are both members of the benchmark Straits Times Index. While the former trades well relative to book value, the latter trades way below its latest NAV per unit.

If the private fund route works, maybe FLCT can be privatised with its properties, then put into a private fund.

While Frasers Property deserves kudos for being a responsible sponsor by offering FHT’s minority investors a clean exit on financially reasonable terms, the property group has to be accountable to its shareholders. Frasers Property might see hospitality as a core business and have a long-term investment view – still, it must work harder to improve capital efficiency to benefit its shareholders.

Ultimately, Frasers Property’s board should emulate what the boards of FHT’s managers did by conducting a review of Frasers Property’s strategy.

Its free float is small – about 11 per cent of its shares are held by the public, based on its latest annual report. TCC Assets, which is linked to Thai tycoon Charoen Sirivadhanabhakdi, owns around 86.9 per cent of Frasers Property.

Given Frasers Property’s small free float and deep discount to book value, the most plausible way to unlock value for its shareholders could be for Charoen to lead a consortium to privatise Frasers Property.

Might the local bourse soon lose not only FHT but also Frasers Property, which is active in mixed-use, residential, retail, office, business park, logistics and industrial properties and has footprints in Singapore, Australia, Europe, China and South-east Asia? 

Privatisations and delistings are part of any functioning listed equities market. And minority investors of target entities will welcome receiving privatisation offers so long as these are not lowball ones.

As privatisations play out on the local exchange, stakeholders working on developing Singapore’s equities market must work fast and hard to make the local bourse more vibrant.

The writer owns shares in Frasers Property