Far East Hospitality Trust - CIMB Research 2018-01-02: Incorporating Acquisition And Higher Organic Growth

FAR EAST HOSPITALITY TRUST Q5T.SI

Far East Hospitality Trust - Incorporating Acquisition And Higher Organic Growth

We now project 10% growth in FY18F DPU, boosted by potential accretive acquisition of sponsor’s Oasia Hotel Downtown and recovery in Singapore's hotel market. We assume a 5% entry yield on S$283m valuation for Oasia Hotel Downtown.
Given the cyclical recovery in Singapore hotel market, we project a 5% yoy rise in Far East Hospitality Trust (FEHT)’s Singapore hotel RevPAR in FY18F, and another 7% in FY19F.
We model in a relatively gradual recovery path for serviced residences. We project a 4% yoy recovery in FY18F.

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With the potential acquisition of Oasia Hotel Downtown in sight, we now factor in this probable event. We assume a 5% entry yield on S$283m property valuation (assuming S$900k/key), which would be fully debt-funded at 2.5% interest cost (which is the trust’s weighted average cost of debt).
We estimate that the acquisition could be completed by 2Q18, which could provide a 6-8% accretion to FY18F-19F DPU.
In addition, we project gearing to hike up to 40.5% in FY18F (3Q17: 31.1%).

As we expect FEHT's Singapore's hotels’ occupancy to remain in the high-80%, we project a 5% yoy rise in average room rate (ARR) and a corresponding 5% improvement in revenue per available room (RevPAR) for FY18F.
We expect 7% yoy increase in FY19F RevPAR, driven by a 5% rise in ARR and 2%-pts yoy increase in occupancy.
We note that FY19F ARR of S$169 would still be 12% lower than the peak ARR of S$192 FEHT achieved in FY13, suggesting room for upside (especially in the event of a supply squeeze).

For FY18F, we project a 4% yoy recovery in revenue per available unit (RevPAU), after a 9% drop in FY17F.
Hougang SR lost a corporate contract in 1Q17, but has shown marked qoq improvement since then. Nonetheless, we expect recovery for SRs to be relatively gradual vs. hotels.
In addition, we expect rental income from commercial premises to stabilise at c.S$23m p.a.

Incorporating the potential acquisition of Oasia Hotel Downtown and higher growth from FEHT’s hotel portfolio, we raise our FY18F-19F DPU by 7.9-11.3%. We trim our FY17F DPU by 0.1% as we further decrease SRs’ contributions.
Our DDM-based TP is also bumped up with higher LTG of 2.5% (previously 2%).
Our TP of S$0.84 implies 5.7% FY19F yield and 0.94x current P/BV.

Downside risks to our call include slower-than-expected recovery in the Singapore market and unfavourable acquisitions.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2018-01-02

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