Far East Hospitality Trust - OCBC Investment 2016-11-11: Look out for inorganic growth

FAR EAST HOSPITALITY TRUST Q5T.SI

Far East Hospitality Trust - Look out for inorganic growth

Far East Hospitality Trust’s (FEHT) 3Q16 results were consistent with our expectations, with 9M16 revenue and DPU making up 74.5% and 75.4% of our FY16 forecast respectively.
3Q16 gross revenue fell 5.5% YoY to S$28.0m while 3Q distributable income fell 6.0% to S$20.3m, amidst weakness in corporate travel demand. As a result, 3Q DPU dropped 6.7% YoY to 1.12 S cents.

3Q16 AOR of the hotel portfolio was 1.0 ppt higher YoY at 88.4% while ADR declined 6.9% to S$161, resulting in a 5.8% decline in RevPAR to S$142. For hotels, the lower-rate leisure segment contributed 63.7% of hotel revenue in 3Q16, up 4.8 ppt from 3Q15.
3Q AOR and ADR for Serviced Residences (SRs) declined by 0.2 ppt YoY to 90.0% and 2.5% YoY to S$226 respectively, resulting in a 2.7% decline in RevPAU to S$203.
A decrease in revenue contribution from Service-related business (e.g. HQ admin, accounting, law, advertising, etc.) was partially compensated by growth in Banking & Finance and Electronics & Manufacturing. For SRs, the corporate segment contributed 83.5% of revenue, 1.0 ppt more than a year ago.

While prospects for organic growth look muted, we note that the REIT manager is looking out for potential acquisitions, particularly assets from the Sponsor such as Oasia Downtown.
On feedback that Oct was a relatively bad month for hotels, we pare down our expectations for 4Q16. As a result, FY16 hotel RevPAR is now expected to drop 5.6% YoY (vs. a 4.5% decline previously).
Encouraged by improved contributions from Regency House post-renovation, our FY16 SR RevPAU is now projected to fall 5.7% YoY (vs. a 6.0% decline previously). This results in our FY16 DPU forecast falling by 0.9% to 4.22 S cents.
We are also more bearish on FY17, and project a 3.5% drop in hotel RevPAR (from a 2.0% drop previously). Our fair value dips marginally from S$0.64 to S$0.62.
Against yesterday’s closing price of S$0.600, FEHT is currently trading at a blended FY16/17 forecasted distribution yield of 6.8%. FEHT’s gearing ratio remains at 32.8%.
Maintain HOLD.

Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2016-11-11

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.62 Down 0.640