Far East Hospitality Trust - DBS Research 2016-11-11: Headwinds still present

Far East Hospitality Trust - DBS Vickers 2016-11-11: Headwinds still present FAR EAST HOSPITALITY TRUST Q5T.SI

Far East Hospitality Trust - Headwinds still present

  • 3Q16 DPU of 1.12 Scts (-7% y-o-y) in line with our expectations.
  • RevPAR for hotels and serviced residences down 6% and 3% y-o-y respectively.
  • Cautious outlook given 6% growth in supply in 2017 and soft corporate demand.


Limited re-rating catalysts. 

  • We maintain our HOLD call with a revised TP of S$0.62. 
  • As a Singapore-focused REIT and with competitive pressures in the Singapore hospitality market that are expected to persist, we believe there are limited re-rating catalysts for Far East Hospitality Trust (FEHT) in the near term. 
  • This is despite the inherent long-term value given that FEHT is trading at 0.6x P/BV.


Competitive pressures to persist. 

  • While the majority of new hotel supply in Singapore this year is largely concentrated within the Singapore River precinct away from FEHT’s hotels, we believe the 5-6% increase in overall industry room inventory will still put pressure on FEHT’s operations. 
  • In addition, with new room supply not easing until 2018, corporate demand still soft and FEHT’s new hotel in Sentosa only completing in 2018, we expect FEHT’s DPU performance to remain muted over the coming year.


Strong balance sheet. 

  • Even though we are cautious on FEHT’s near-term earnings, there is significant upside to our forecast if FEHT deploys its strong balance sheet well. FEHT’s gearing as at end-September 2016 stood at approximately 32% and its sponsor provides a clear and visible ROFR pipeline of seven properties.


Valuation

  • After delaying our expected recovery of the Singapore office market from 2017 to 2018, we have lowered our DCF-based TP from S$0.65 to S$0.62.


Key Risks to Our View

  • Rebound in demand and acquisitions. Our cautious stance on FEHT is premised on a supply imbalance in the Singapore hospitality market. 
  • However, a significant rebound in demand, absorbing the new room supply, and FEHT utilising its strong balance sheet, would lead to upside risks to our DPU estimates and TP.




Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2016-11-11
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.62 Down 0.650




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