Far East Hospitality Trust - DBS Research 2018-07-31: Keep The Faith Still On The Recovery Path

FAR EAST HOSPITALITY TRUST SGX:Q5T

Far East Hospitality Trust - Keep The Faith Still On The Recovery Path

Far East Hospitality Trust (FEHT)’s 2Q18 DPU of 1.01 Scts (+4% y-o-y), the second consecutive y-o-y increase.
But results below expectations due to weaker than expected serviced residence performance.
Hotel portfolio remains on a recovery path with 2Q18 RevPAR up 6.9% y-o-y.

We maintain our BUY call with a revised Target Price of S$0.74 for Far East Hospitality Trust (FEHT).
We believe 2017 marked the cyclical low in FEHT’s earnings and as the Singapore hospitality market enters an upturn in 2018, a recovering DPU trend should drive the stock price higher.
FEHT is also attractively priced, trading at c.0.80x P/BV and offers a decent 6.3% yield.

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Consensus has a HOLD recommendation on Far East Hospitality Trust (FEHT) given uncertainty over the sustainability of its distributions. While acknowledging the challenges faced by FEHT’s serviced residences following the reduction in the minimum stay for residential buildings from 6 to 3 months, in our view, this risk has been priced in given that FEHT already trades at a significant discount to book value and the serviced residences only represent 10-12% of revenue.
We also believe consensus is ignoring the expected recovery in the Singapore hotel portfolio demonstrated by a 5% y-o-y increase in revenue per available room (RevPAR) in 1H18.

After the recent acquisition of Oasia Downtown, we understand Far East Hospitality Trust remains engaged with its Sponsor on potential acquisitions. Any acquisition provides further upside to our earnings and DPU estimates.

After incorporating a weaker serviced residence performance, we lowered our DCF-based Target Price to S$0.74 from S$0.76.

The risk to our positive view would arise from a deep contraction this year or delay in recovery of the Singapore hospitality market next year.

For the second consecutive quarter, Far East Hospitality Trust (FEHT) reported a y- o-y increase in DPU, with 2Q18 DPU rising 4.1% y-o-y to 1.01 Scts. However, this was below expectations with 2Q18 and 1H18 DPU only representing 23% and 44% of our FY18F DPU respectively.
While we had expected serviced residence properties to be weak, the decline in average daily rate (ADR) was larger than expected, as corporate employee relocation activities remained subdued and affected yields. 2Q18 ADR fell 6.8% y-o-y to S$202, resulting in RevPAR falling 4.5% y-o-y to S$168. However, occupancy was stronger, up 2ppts to 83.5%.
Overall 2Q18 revenue and NPI jumped 10.2% and 11.2% y-o-y respectively, largely due to the recent acquisition of Oasia Downtown Hotel.
2Q18 revenue for hotels increased by 18.7% y-o-y, while revenue for serviced apartments fell 7.7%. The commercial operations had a soft quarter, with 2Q18 revenue falling 4.1% y-o-y.

Far East Hospitality Trust (FEHT)’s hotel portfolio had a strong quarter, despite competition from new hotels that opened last year and that one of FEHT’s hotels, Orchard Parade hotel which is near St Regis, possibly faced some disruption during the Trump-Kim summit in June.
2Q18 RevPAR jumped 6.9% y-o-y to S$143, driven by a 2.7ppt increase in occupancy and 3.7% y-o-y increase in ADR to S$160. This followed the 3.7% y-o- y increase in RevPAR in 1Q18.
Excluding the impact of Oasia Downtown, we understand RevPAR for the Singapore hotels in 2Q18 grew at a similar pace to that in 1Q18.
FEHT guided that the strong performance for the hotel portfolio was due to major events such as Food & Hotel Asia in April and CommunicAsia in June.

As a result of the debt funded acquisition of Oasia Downtown, gearing jumped to 40.3% from 35.1% at end 1Q18.
The proportion of fixed rate debt also increased to 46.9% from 40.8% at end 1Q18. However, with additional interest rate swaps post balance date, the proportion of fixed rate debt should improve to 54.2%.
Average cost of debt was maintained at 2.5%.
Meanwhile, NAV per unit was stable at S$0.87.

To better incorporate the weaker than expected serviced residence performance and 2Q18 results, we trimmed our FY18-20F DPU and lowered our DCF-based Target Price to S$0.74 from S$0.76.

With c.16% total return expected over the coming months, we maintain our BUY call with a revised Target Price of S$0.74
While 2Q18 results disappointed, we believe we have seen the lows in DPU last year and expect a recovery over the next few years, following the acquisition of Oasia Downtown this year and the expect multi-year recovery in the Singapore hotel market.

Mervin SONG CFA DBS Group Research Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-07-31

SGX Stock Analyst Report BUY Maintain BUY 0.74 Down 0.760