OUTLOOK STILL UNCERTAIN
Competitive pressures to persist.
- We maintain our HOLD recommendation and TP of S$0.78.
- As a Singapore-focused REIT and with competitive pressures in the Singapore hospitality market expected to persist, we believe there is limited re-rating catalyst for FEHT in the near term.
Expect weak 2Q15 results.
- We expect FEHT to report declines in RevPAR in the upcoming 2Q15 results. This follows on from 1Q15 where RevPAR for FEHT’s serviced residences and hotels fell 7% and 11% y-o-y respectively, as a consequence of a 6% drop in tourist arrivals.
- While we had expected a temporary boost in June as some of FEHT's hotels were used to house the athletes and their families for the SEA Games, we understand from our industry contacts that this was offset by weak corporate demand. Thus RevPAR over June, similar to April and May, is expected to be under pressure.
- Moving into 2H15, with the market having to absorb c2,400 rooms from 2Q15, operating conditions should remain challenging for the remainder of the year.
Low gearing presents earnings surprise.
- With earnings from its core Singapore portfolio under pressure, acquisitions pose significant earnings upside risk.
- Assuming FEHT gears up to the 40% level from 31.5% currently, the trust will have c.$132m of debt headroom for acquisitions.
Valuation:
Fairly Valued.
- To account for the weaker-than-expected corporate demand, we have lowered our FY15 serviced residence RevPAU estimates from 0% to -4%.
- This translates into a 1% cut to our FY15-16F DPU.
- After rolling forward our valuation to FY16F, we have also raised our DCF-based TP to S$0.78 from S$0.76.
- Given modest returns expected over the coming year, we maintain our HOLD recommendation.
- Despite the negative outlook, we do not have a SELL call, given that FEHT already trades at a low 0.8x book.
Key Risks to Our View:
Rebound in demand.
- Our cautious stance on FEHT is premised on a supply imbalance in the Singapore hospitality market.
- However, should we experience a significant rebound in demand which absorbs the c.3,000 new rooms being added this year, there will be upside risks to our DPU estimates and TP.
Potential Catalyst: Recovery of the Singapore hospitality market and acquisitions.
Where we differ: Below consensus due to expected decline in RevPAR.
(Mervin SONG CFA, Derek TAN)
Source: http://www.dbsvickers.com/
