Far East Hospitality Trust - DBS Research 2019-07-31: Hazy Near Term Outlook


Far East Hospitality Trust - Hazy Near Term Outlook

  • Far East Hospitality Trust's 2Q19 DPU of 0.91 Scts (-10% y-o-y) was below expectations.
  • Results impacted by 4.5% decline in hotel RevPAR due to absence of major events in the prior year, and soft corporate demand.
  • Uncertain demand outlook likely to cap Far East Hospitality Trust’s share price performance in the near term.
  • Downgrade to HOLD, Target Price unchanged at S$0.70.

Downgrade to HOLD.

  • We downgrade our call on FAR EAST HOSPITALITY TRUST (SGX:Q5T) to HOLD from BUY. While we remain bullish on Far East Hospitality Trust’s long term prospects given modest supply growth over the next few years, near term, we believe Far East Hospitality Trust’s share price may be range bound given
    1. expected decline in DPU in FY19,
    2. headwinds from new hotels that opened over the past year in terms of price competitive, and
    3. uncertain corporate and leisure demand on the back of the impact of recent trade tensions and slowing economic outlook.

Where we differ – Downside risk to consensus estimates with FEHT’s yield at -1SD of mean.

  • Our FY19-21F DPU are 9-12% below consensus estimates as we have projected
    1. 1% decline in RevPAR for the hotel portfolio in FY19 and modest 2% p.a. RevPAR growth thereafter, and
    2. drag on DPU growth from the additional units issued from the distribution reinvestment plan.
  • With downside risk to consensus estimates and Far East Hospitality Trust already trading on a forward yield of c.5.5%, slightly below -1 SD yield of its mean of 5.6%, we believe share price re-rating catalysts in the near term is limited.

Upside from acquisitions.

  • After the acquisition of Oasia Hotel Downtown in early 2018, we understand Far East Hospitality Trust is engaged with its Sponsor on potential acquisitions. Any acquisition would provide upside to our earnings and DPU estimates and we may review our near-term cautious stance.

WHAT’S NEW - Taking a pause for now

Soft 2Q19 results.

  • Far East Hospitality Trust's 2Q19 DPU was weaker than expected, falling 9.9% y-o-y to 0.91 Scts. This took 1H19 DPU to 1.82 Scts (-6.7% y-o-y), which only represented c.44% of our original FY19F DPU.
  • The weaker than expected results was due to a 4.5% y-o-y decline in revenue per available room (RevPAR) to S$137 for the hotel portfolio. Both occupancy and average daily rate (ADR) reported declines, to 88.1% (89.8% in 2Q18) and S$156 (S$160 in 2Q18) respectively.
  • The portfolio was impacted by the absence of large conventions and meetings associated with Singapore being the chair of ASEAN. We had originally anticipated a modest increase in RevPAR due to easing supply pressure but we understand the new hotels that opened over the past year have continued to price their rooms competitively, and demand from the corporate sector remains soft owing to the impact of the recent trade tensions.
  • Nevertheless, 2Q19 results were buffeted by a 3% y-o-y rise in revenue per available unit (RevPAU) for the serviced residence portfolio. The serviced residences benefited from growth in the leisure segment which had shorter bookings at higher room rates. This resulted in ADR rising 5% y-o-y to S$212, offsetting the 1.6ppt fall in occupancy to 81.9%.

Stable capital structure.

  • Gearing was relatively stable at 39.8% and is expected to ease slightly as the distribution reinvestment plan will be applied to 1H19 DPU.
  • In addition, with c.25% of borrowings on floating rates, given expectations that the US Federal Reserve will cut interest rates by 50bps, Far East Hospitality Trust’s borrowing cost may decline later in the year.

Strong 2H19 expected but tweaking DPU estimates lower.

  • While we expect Far East Hospitality Trust to post a stronger 2H19 led by the seasonal uplift and more positive tone from management during the results briefing, but given the lower than expected results, we have reduced our FY19-21F DPU by 7-9%. We now assume a 1-2% fall in hotel RevPAR in FY19 with 2% increase p.a. thereafter. This compares to our earlier expectations of c.3% p.a. increase.
  • Nevertheless, we have retained our DCF-based Target Price of S$0.70, as our lower earnings estimates are offset by a lower risk-free rate (2.5% versus 3.0% previously) and cost of debt (3.0% versus 3.5% previously). We have also rolled forward our valuation base to FY20.

Downgrade to HOLD, Target Price unchanged at S$0.70.

  • Given limited upside to our Target Price of S$0.70, we downgrade our recommendation on Far East Hospitality Trust from BUY to HOLD.
  • Despite potential growth in RevPAR in the medium term due to limited new room supply in Singapore over the next few years (c.1% p.a. versus 4-7% previously), the uncertain demand outlook given the current macro uncertainties and still stiff price competition from the new hotels that opened over the past year, means there could be still downside risk to our estimates.
  • In addition, we believe with Far East Hospitality Trust already trading on a forward yield of 5.5%, which is slightly below -1SD of its mean yield of 5.6%, many investors are likely to take a wait and see approach until there is further evidence of a more robust outlook. This is likely to put a cap on Far East Hospitality Trust’s near term share price performance.

Derek TAN DBS Group Research | Carmen TAY DBS Research | https://www.dbsvickers.com/ 2019-07-31
SGX Stock Analyst Report HOLD DOWNGRADE BUY 0.700 SAME 0.700