Far East Hospitality Trust - DBS Research 2020-01-24: Market Diversification Provides A Buffer


Far East Hospitality Trust - Market Diversification Provides A Buffer

  • Gross operating profit for the quarter was higher across its six markets.
  • Singapore and Japan hotels to benefit from a strong line up of MICE events and Tokyo Olympics respectively.
  • Market diversification and exposure in service residences a shield against the Wuhan virus outbreak.
  • Positive RevPAR outlook with a further three assets earmarked for AEI.

Stellar 1Q20 Results

1QFY20 DPU of 1.3301 Scts formed 31.5% of our full year forecast.

  • Gross revenue and NPI increased 4.3% and 6.8% y-o-y to S$42.4m and S$33.2m in 1QFY20. The positive growth momentum was seen across Far East Hospitality Trust (SGX:Q5T)’s entire portfolio, led by its hotels in Singapore, UK and Germany.
  • Far East Hospitality Trust’s Japan and Malaysia portfolios are on a recovery path from a low base. Distributable income of S$25.5m (+7.4% y-o-y) exceeded our forecast and made up 31.6% of our full year estimate of S$80.7m.
  • The first quarter is usually a strong quarter for Far East Hospitality Trust, contributing 26-28% to yearly distributable income based on past trends, and 1QFY20 has outperformed.

Gross operating profit improvements across all Far East Hospitality Trust’s markets.

  • Portfolio occupancy inched up 160 bps to 90.3% from the same quarter last year. This quarter, the Australia portfolio’s GOR (Gross Operating Revenue) and GOP (Gross Operating Profit) increased 1.9% and 5.4% y-o-y due to higher food and beverage revenue and better cost control. Management disclosed that new supply continues to be a risk for the coming few years. Approximately 2,300 new rooms will be added in the CBD area in Sydney by 2021, while there are 4,200 rooms under construction between 2020 to 2022 in Melbourne.
  • The Singapore portfolio reported a 2.6% y-o-y increase in GOR and 2.0% increase in GOP, on the back of higher ADR and occupancy, driven by stronger leisure and corporate demand. A strong pipeline of sizeable inaugural MICE events in 2020 will continue to fuel room demand in Singapore.
  • Supply is marginal for the next 3 years, increasing by a CAGR of 0.7% (2020 – 2022). RevPAR grew 6.9% y-o-y for Far East Hospitality Trust’s Singapore hotels.
  • The GOR and GOP for the UK portfolio rose 5.5% and 7.3% y-o-y, and continued to benefit from the weak pound despite Brexit uncertainty. Management indicated that risks in 2020 include higher labour costs if the minimum wage increases from £8.21/hour to £8.72/hour from April 2020 for workers over the age of 25.
  • ANA Crowne Plaza Kobe saw a 13.1% rise in GOP despite a 3.3% decline in GOR as the hotel continues to streamline operations. The Kobe hotel might see more tourist demand spilling over from the Tokyo Olympics, which is expected to drive inbound visitors to 40m for the year. Westin Kuala Lumper clocked an impressive 46.4% rise in GOP on the back of a 11.5% rise in room revenue. The hotel managed to reduce operating costs, in part, through the installation of new energy-efficient heat pumps. Outlook remains flattish with a near term supply glut partially absorbed by higher tourist arrivals.

Stable financial metrices.

  • Gearing stood at 35.5%, on par with sector average, while weighted average debt to maturity was 4.38 years. This leaves a debt headroom of c.S$200m on a target gearing ratio of 40%. Effective cost of borrowing was 2.4% with 73.4% of borrowings hedged on a fixed rate. Forex remains a key risk as 80% and 60% of the decline in gross revenue and NPI in FY2019 was due to forex loss.

Acquisitions and asset enhancements in mind.

  • Management highlighted three key markets they have in mind for future acquisitions, including Japan, Netherlands and Germany. Sponsor currently owns 3 assets in three separate cities in Germany and these could be considered for acquisition by Far East Hospitality Trust. Three assets have also been shortlisted for AEI, and include Crowne Plaza Kobe (CPK), Park International London (PIL) and Novotel Melbourne on Collins (NMC).
  • There are plans to renovate CPK, while PIL and NMC have been earmarked for rebranding to increase RevPAR within the medium term.

The Wuhan flu bug has landed, but don’t panic yet.

  • We are approaching the start of a slew of upcoming conference events in 1H20 (Singapore Airshow, Food & Hotel Asia) which are expected to bring up to 80k trade event participations.
  • While we have not seen any cancelations at this moment, the impact on hoteliers’ performance will be significant if the virus spreads. If the situation worsens, the number of tourists and business travellers will likely plunge as corporates curtail non-essential travel to Singapore. Hoteliers may fall into a vicious cycle of tumbling occupancy rates (AOR) and hotel room rates (ADR), as they look to compete for guests in a diminishing demand environment.
  • Back during the SARs outbreak in Feb’03, average occupancy saw a steep drop to 42% in 2QFY03 as compared to an average of 70% - 75% for full year 2003, which is below the average breakeven point of 55%-60% for a hotel. The rebound back to 70+% occupancy levels was swift given the proactiveness of the authorities to contain the further spread of SARS. We believe both the authorities and hoteliers are better geared to combat the current pandemic given prior experience with SARS and lower fatality rate of the Wuhan as compared to SARS.
  • See Far East Hospitality Trust Share Price; Far East Hospitality Trust Target Price; Far East Hospitality Trust Analyst Reports; Far East Hospitality Trust Dividend History; Far East Hospitality Trust Announcements; Far East Hospitality Trust Latest News,

Singapore Research Team DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-01-24
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