Far East Hospitality Trust - OCBC Investment 2017-02-23: Bottom-pick in anticipation for FY18 stabilization

Far East Hospitality Trust - OCBC Investment 2017-02-23: Bottom-pick in anticipation for FY18 stabilization FAR EAST HOSPITALITY TRUST Q5T.SI

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.

Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2017-02-23
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.60 Down 0.620