Far East Hospitality Trust - OCBC Investment 2017-05-15: Fairly Valued, Look To 2018

Far East Hospitality Trust - OCBC Investment 2017-05-15: Fairly Valued; Look To 2018 FAR EAST HOSPITALITY TRUST Q5T.SI

Far East Hospitality Trust - Fairly Valued; Look To 2018

  • Hotel RevPAR drops 4.6%.
  • Introduction of DRP.
  • Fair value stays at S$0.60.

1Q17 results came in at the lower end of expectations 

  • Far East Hospitality Trust’s (FEHT) 1Q17 results were within expectations albeit on the lower end, with revenue and DPU making up 23.7% and 23.6% of our full-year forecasts respectively.
  • 1Q17 DPU dropped 13.9% YoY to 0.93 S cents on the back of a 9.5% YoY decline in revenue to S$24.8m.

SR occupancy dropped 13.1ppt, but has recovered since 

  • 1Q17 Hotel RevPAR declined 4.6% YoY to S$134, mainly because ADR dropped 4.7% to S$152.
  • Hotels continue to face weak corporate demand as well as heightened competition from new supply. 1Q17 Serviced Residences (SR) RevPAU dropped 14.0% YoY to S$162, largely due to a 13.1 ppt dip in occupancy to 71.2%, which more than offset a 1.8% increase in ADR to S$227.
  • The drastic drop in RevPAU was partly due to the sudden loss of a major tenant at the Village Residence Hougang. SR revenue from the Banking & Finance and Services segments was particularly weak in 1Q17, while the contributions from Oil & Gas and Electronics & Manufacturing showed some improvement.
  • Nonetheless, we estimate that the occupancy rate for the SR portfolio has now stabilized at a level slightly above 80% for 2Q17.

Getting ready to acquire Oasia Hotel Downtown? 

  • We note that FEHT has introduced a Distribution Reinvestment Plan (DRP), for which it has received indicative support from its sponsor.
  • With the DRP expected to help FEHT build up its cash balance, we see this as a prudent capital management policy that will offer the REIT more funding options for future acquisitions, which may include Oasia Hotel Downtown, in our view.
  • In terms of AEI, room refurbishments and a renovation of the club lounge at Orchard Parade Hotel will start later this quarter, and is expected to last around a year. After incorporating the 1Q results and adjusting our forward assumptions, our fair value stays at S$0.60. 
  • While FEHT still has a challenging few quarters ahead, we believe it will be a primary beneficiary of a stabilization in the Singapore hospitality market in 2018 and beyond. 
  • FEHT’s gearing ratio as at 31 Mar 2017 is 32.3%. Maintain HOLD.

Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2017-05-15
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.600 Same 0.600