Far East Hospitality Trust - Holding pattern
- 4Q16 DPU of 1.17 Scts (-4.3% y-o-y) slightly ahead of expectations.
- Excess room supply results in 2-7% decline in hotel and serviced residences RevPAR.
- Exploring potential acquisition which will boost DPU.
Limited re-rating catalysts.
- We maintain our HOLD call with a revised TP of S$0.63.
- 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 c.0.65x P/BV.
Competitive pressure to persist.
- With 6% increase in room supply in 2017 versus a projected 4% growth in visitor arrivals, we believe the Singapore hospitality market will remain under pressure. Thus, we have pencilled in a 4-5% fall in RevPAR for FEHT’s hotels and serviced residences. This in turn should translate to a 4% dip in FY17 DPU before a potential recovery from 2018 onwards when supply pressure ease.
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-December 2016 stood at approximately 32% and its sponsor provides a clear and visible ROFR pipeline of seven properties.
- After incorporating slightly better performance from FEHT’s commercial operations, we raised our DCF-based TP from S$0.62 to S$0.63.
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.