Far East Hospitality Trust - Bottom-pick in anticipation for FY18 stabilization
- Proj. 5.5% RevPAR decline for FY17.
- Trading at 6.6% FY17 yield.
- Fair value now at S$0.60.
FY16 results within expectations
- Far East Hospitality Trust’s (FEHT) FY16 results were within expectations, with revenue and DPU making up 100.3% and 102.6% of our forecast, respectively.
- FY16 DPU dropped 5.9% to 4.33 S cents on the back of a 4.9% decline in revenue to S$109.1m. FEHT’s assets were affected by the weak corporate segment, which outweighed the stronger events calendar in 2016 for hotels.
Hotel RevPAR continues its decline
- FY16 Hotel RevPAR declined 5.3% to S$139, as ADR dropped 7.0% to S$159, offsetting the 1.6ppt gain in occupancy to 87.0%.
- FY16 Serviced Residences (SR) RevPAU dropped 5.8% to S$146, affected by both a 3.6% decline in ADR and a 2.0ppt drop in occupancy to 85.0%.
- In comparison, 4Q16 showed a more pronounced 7.3% decline in Hotel RevPAR to S$136, but a smaller 2.3% drop in SR RevPAU to S$146.
- We note that in 4Q16, the decrease in revenue contribution from Banking & Finance and Services was partially offset by a growth in Oil & Gas and Electronics & Manufacturing.
- The management emphasized that its SRs are seeking a more diverse base of long-term tenants.
Looking forward to RevPAR recovery in 2018
- We note that current data forecasts suggest that 2017 will be another year with RevPAR/ RevPAU declines: supply is forecasted to grow around 6% this year vs. a 0%-2% growth in FY17 arrivals projected by the Singapore Tourism Board as well as a weak corporate outlook in 1H17 following policy uncertainties in US and Europe.
- In addition, the events calendar is typically less packed in odd-numbered 2017. As such, we are more bearish on FY17, and project a 5.5% drop in hotel RevPAR (from a 3.5% drop previously).
- As a result, our fair value dips marginally from S$0.62 to S$0.60.
- Nonetheless, we believe that 2017 will present important opportunities for cost averaging in anticipation of RevPAR/RevPAU stabilization in 2018, and encourage longer-term investors to collect shares at S$0.55 and lower.
- Against yesterday’s closing price of S$0.595, FEHT is currently trading at a FY17 forecasted distribution yield of 6.6%. Maintain HOLD.