Far East Hospitality Trust - CGS-CIMB Research 2018-07-31: Encouraging 2QFY18

FAR EAST HOSPITALITY TRUST SGX:Q5T

Far East Hospitality Trust - Encouraging 2QFY18

FEHT’s 2QFY18 DPU of 1.01 Scts (+4.1%) was in line with our expectations. 1HFY18 DPU made up 46.2% of our full-year forecast.
The stronger hotel business had offset the weaker serviced residence (SR) and commercial segments as well as higher interest expenses.
We expect solid earnings growth in 2H due to the contribution from Oasia Downtown, post-renovation of Orchard Parade and recovery in the industry.
Maintain ADD at an unchanged Target Price of S$0.79.

FEHT’s 2QFY18 revenue rose 10.2% while NPI was up 11% y-o-y, mainly contributed by
1. the addition of Oasia Hotel Downtown of which the acquisition was completed in Apr 2018, and
2. increase in master lease rental from the hotels.
This offset the softness in its serviced residence (SR) and commercial segments.
2QFY18 DPU improved at a smaller rate of 4.1% y-o-y to 1.01 Scts due to higher interest expense and larger share base. 1HFY18 DPU was 46.2% of our full-year estimate, which we deem in-line.

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FEHT’s 2QFY18 RevPAR improved 6.9% y-o-y on the back of an increase in average occupancy (+2.7%pts to 89.8%) and average daily rate (ADR) (+3.7% to S$160). Most hotels saw stronger RevPAR. Although hotels generally saw a weaker week during the Trump-Kim Summit, Rendezvous and Orchard Parade hotels saw higher occupancy due to media bookings.
More importantly, the trust deployed the right strategy in tackling late bookings, resulting in better RevPAR. The completion of the Orchard Parade renovation and major events have also contributed to higher RevPAR. Excluding the effect of Oasia Downtown, RevPAR was in line with 1QFY18 RevPAR of 3.3%.

FEHT’s serviced residence (SR) business continued to see softness, with revenue declining by 7.7%. While 2QFY18 occupancy rate increased 2% pts y-o-y to 83.5%, ADR declined 6.8% to S$202, resulting in a 4.5% pts decline in RevPAU to S$171. Corporate demand remained subdued. Village Residence Hougang was affected by the departure of large corporate groups.
Although the trust has managed to maintain occupancy, ADR declined y-o-y due to smaller group size. Outlook for the SR business remains cloudy in the near term.

The recently-acquired Oasia Downtown’s performance has been above expectations so far. There are no immediate plans to acquire another asset. The only new asset from the sponsor is Oasia Residence West Coast and this is a serviced residence, a sector facing slow demand. The rest of the assets are still under development.
The JV hotels are poised to open in 2019 but the trust needs to wait until the hotels stabilise before they can be acquired. The Elizabeth Hotel is in the pipeline for rebranding.

Management remains upbeat on the outlook of its hotel business going forward, driven by stronger tourist arrivals and lower supply of hotels next year. We noted July RevPAR is still trending well.
As for the SR business, although the trust is putting effort to beef up the performance, near-term outlook remains weak due to poor corporate demand.

We maintain ADD on the stock with an unchanged DDM-based Target Price.
We expect the trust to continue to deliver solid earnings growth in the 2H due to the addition of Oasia Downtown, post-renovation of Orchard Parade and recovery in the industry.
A slight drag could come from weaker-than-expected RevPAU for SRs.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-31

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