Far East Hospitality Trust - DBS Research 2017-05-15: Rebound Not Far Away

Far East Hospitality Trust - DBS Vickers 2017-05-15: Rebound Not Far Away FAR EAST HOSPITALITY TRUST Q5T.SI

Far East Hospitality Trust - Rebound Not Far Away

  • 1Q17 DPU of 0.93 Scts (-14% y-o-y) below expectations.
  • Serviced residences had a weak quarter, with RevPAU down 14% y-o-y.
  • Near term headwinds but recovery in the Singapore market is only seven months away; Upgrade to BUY.

Upgrade to BUY. 

  • We upgrade Far East Hospitality Trust (FEHT) to BUY from HOLD with a revised TP of S$0.66. 
  • We believe 1H17, will mark the cyclical low in FEHT’s earnings, given the pressure from new hotel supply in 1H17, but expect a recovery in the market from 2018 onwards, and potential use of its strong balance sheet for acquisitions. 
  • In addition, FEHT’s valuation is attractive at c.0.7x P/BV and offers 6.6% yield.

Where we differ – 

Recovery from 2018 

  • Consensus is currently recommending investors to avoid FEHT given an expected 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. While a recovery has failed to materalise over the past two years due to new supply being pushed back, we do not expect this to occur.  

Upside surprise from acquisitions. 

  • We understand FEHT is actively engaging its Sponsor on potential acquisitions. With a low gearing of only 32% 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.


Slow start to the year - Serviced residences extremely weak 

  • 1Q17 DPU fell 14% y-o-y to 0.93 Scts which represented c.22% of our full year forecast, below expectations. The weaker than expected result was primarily due to the underperformance of the serviced residence operations. Revenue per available unit (RevPAU) fell 14% y-o-y as occupancy declined to 71.2% from 84.3% in 1Q16. 
  • Demand for serviced residences was weak owing to fewer project and training groups coming to Singapore as well as softness emanating from the Banking & Finance and Services sector. As such, the proportion of serviced residence revenues coming from the corporate segment fell to 76.5% from 84.9% in the prior year. However, FEHT was able to hold rates, with average daily rate (ADR) rising 1.8% y-o-y to S$227. Furthermore, we understand occupancy has since recovered to around 80%.
  • The hotel operations also had a weak quarter with revenue per available room (RevPAR) dropping 5% yo-y to S$134. However, this drop was largely inline.
  • Occupancy for the hotels was stable at 88.1% with ADR falling 5% y-o-y to S$152 on the back of heightened price competition in Singapore. Owing to FEHT’s top line tied to a percentage of gross operating revenue and gross operating profit of FEHT’s various hotels and serviced residences, the 5-14% y-oy falls in RevPAR/RevPAU translated to larger drops in revenue from hotels and serviced residences. 
  • Revenue from the hotel operations fell 10% y-o-y, with revenues from the serviced residences dropping 22% y-o-y.
  • Meanwhile contribution from the commercial premises (offices and retail space) was stable.

Gearing stable 

  • Gearing remains stable at c.32% with average cost of debt steady at 2.5%. The proportion of fixed debt was also maintained at 71%.

Cut FY17-18F DPU by 4-5% 

  • On the back of the weaker than expected 1Q17, we cut our FY17-18F DPU by 4-5%. We now assume ADR for the serviced residences to fall 8% versus 4% previously.
  • In addition, we have incorporated FEHT’s decision to introduce a dividend reinvestment plan (DRP). The DRP will provide additional working capital as well as additional capital to fund asset enhancement and other growth initiatives. 
  • We also understand that FEHT’s Sponsor (c.43% stake) has indicated that it will participate in the DRP. In our DPU estimates, we have assumed 50% DRP participation rate.

More efficient capital structure 

  • With FEHT indicating that it is actively engaging its Sponsor about potential acquisition opportunities, including Oasia Downtown, we believe FEHT will move towards a more efficient capital structure. 
  • To better reflect this, we now assume a target gearing of 36% versus 32% previously. Thus, we raised our DCF-based TP to S$0.66 from S$0.63 previously.

Upgrade to BUY with revised TP of S$0.66 

  • With close to 17% expected total return over the coming 12 months (10% upside to our revised TP of S$0.66 and 6.6% yield) we upgrade our recommendation from HOLD to BUY.
  • With only seven months till 2018, the year in which we expect the Singapore hospitality market to turnaround, we believe now is the opportune time to increase exposure to FEHT ahead of a recovery in its DPU.
  • In addition, we believe the market is underestimating the ability of FEHT to leverage on its strong balance sheet to pursue DPU accretive acquisitions.

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-05-15
DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 0.66 Up 0.630