Far East Hospitality Trust - DBS Research 2017-08-08: Recovery In Sight

Far East Hospitality Trust - DBS Vickers 2017-08-08: Recovery In Sight FAR EAST HOSPITALITY TRUST Q5T.SI

Far East Hospitality Trust - Recovery In Sight

  • FEHT's 2Q17 DPU of 0.97 Scts (-4% y-o-y) in line with expectations.
  • Downward pressure moderating with RevPAR for both hotels and serviced residences falling less than 1Q17.
  • Recovery in DPU from 2018 onwards should translate to higher share price.



Past the cyclical low. 

  • We maintain our BUY call on Far East Hospitality Trust (FEHT) with a revised TP of S$0.70. 
  • We believe 1H17 marks the cyclical low in FEHT’s earnings, and FEHT should report sequential improvements in DPU going forward as we approach 2018, when the overall Singapore hospitality market should start its upturn. 
  • In addition, FEHT’s valuations are attractive, trading at c.0.75x P/BV and offering a high 6.1% yield.


WHAT’S NEW


Improvement from 1Q17 Still soft but better sequentially 

  • As expected, 2Q17 was weak. DPU was down 4.0% yo-y to 0.97 Scts. However, it was an improvement from 1Q17 where DPU fell 13.9% y-o-y.
  • The decline in DPU was attributed to softness in both the hotel and serviced residence operations. This caused 2Q17’s net property income (NPI) to drop 1.4% y-o-y. The larger drop in DPU was attributed to an increased number of shares arising from management fees paid in units and units related to the trust’s dividend reinvestment plan.

Downturn in hotel and service residences moderating 

  • Revenue per available room (RevPAR) for both the hotel and service residence portfolio while still lower, had moderated from earlier in the year.
    • Hotel RevPAR fell 1.3% y-o-y to S$134, better than the 4.6% y-o-y fall recorded in 1Q17. The fall in 2Q17 RevPAR was mainly due to a 3.4% y-o-y drop in average daily room rate (ADR) which offset the 1.9ppt improvement in occupancy to 87%.
    • Meanwhile, the serviced residence business posted a better sequential improvement. RevPAR dropped 5.7% y-o-y to S$177 compared to 14% y-o-y drop in 1Q17.
  • While both Average Daily Rate (ADR) and occupancy fell 0.6% y-o-y and 4.5ppts to S$217 and 81.5% respectively, the sequential uplift was primarily due to increased focus on filling the properties with corporate customers first, followed by focusing on maximising ADR. Consequently, the share of corporate guests in the serviced residences rose to 79.8% from 76.5% in 1Q17. 
  • Nevertheless, demand from banking & finance and services remains weak, with some growth experience in the oil & gas as well as the online distribution channel.
  • Finally, contribution from the commercial side (offices and retail space) was stable at S$5.8m.

Gearing stable 

  • Gearing was up marginally to 32.8% from 32.3% with average cost of debt steady at 2.5%.
  • The proportion of fixed debt was also maintained at 71%.
  • NAV dipped slightly to 89.71 Scts from 90.33 Scts in 1Q17 due to the increase in the number of units outstanding.


Outlook 

  • While we expect supply to remain an issue pressurising FEHT’s earnings and DPU, we expect FEHT to continue to report a sequential improvement in 2H17. In addition, with a large proportion of the new supply coming onstream in 2H17 predominantly in the upscale and luxury category, there may also be some reduced pressure on ADR as the strategy to slash rates is partially constrained due to the need to maintain a particular price point for the respective brands.
  • Beyond 2017, we expect FEHT to benefit from an expected recovery in RevPAR on easing supply as the government has not released new land for hotel development for the last three years. In addition, FEHT should also gain from the opening of its Sentosa hotel development by end 2018.
  • Additional earnings upside would also come from the deployment of its strong balance sheet, with its gearing only at the 32-33% level.


Maintain BUY with revised TP of S$0.70 

  • We maintain our BUY call with a revised TP of S$0.70.
  • Our TP was increased from S$0.66 as we rolled forward our DCF valuation to FY18.
  • With FEHT’s DPU expected to be on an upturn over the next two to three years as overall market RevPAR recovers, we expect this will translate to a higher share price for FEHT going forward.


Where we differ – Recovery from 2018. 

  • Consensus is currently recommending investors to avoid FEHT given an expected near term decline in DPU. While acknowledging the downward pressure on FEHT’s earnings due to an oversupplied Singapore market, in our view, this risk has been priced in given that FEHT already trades at a significant discount to book value. 
  • In addition, we believe the market is ignoring the expected recovery in the Singapore hospitality market next year. The recovery has failed to materialise over the past two years due to new supply being pushed back, which we do not expect to occur ahead.


Upside surprise from acquisitions. 

  • We understand FEHT is actively engaging its Sponsor on potential acquisitions. With a low gearing of between 32-33% and FEHT initiating a dividend reinvestment plan which its Sponsor has indicated it would participate in, we believe there is high chance of an acquisition over the coming 12-18 months. 
  • In our opinion, the market is unprepared for this positive surprise, which should act as a further re-rating catalyst.


Valuation

  • After rolling forward our valuation to FY18, we raised our DCF-based TP from S$0.66 to S$0.70.


Key Risks to Our View

  • The risk to our positive view would arise from a deep contraction this year or delay in recovery of the Singapore hospitality market next year.




Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-08-08
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.70 Up 0.660



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