Far East Hospitality Trust - DBS Research 2017-02-23: Holding pattern

Far East Hospitality Trust - DBS Vickers 2017-02-23: Holding pattern FAR EAST HOSPITALITY TRUST Q5T.SI

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.


Valuation

  • 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.




Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-02-23
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.630 Up 0.620





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