Far East Hospitality Trust - UOB Kay Hian 2020-09-25: Staying Resilient; Anticipated Recovery Drawing Closer.


Far East Hospitality Trust - Staying Resilient; Anticipated Recovery Drawing Closer.

  • We expect contributions from government contracts to remain stable in 3Q20, followed by a mild pickup boosted by Singaporeans going for staycations in 4Q20. We expect recovery to take place in mid-21 and normalcy to return in 2H21.
  • Far East Hospitality Trust (SGX:Q5T) has demonstrated its defensive qualities with distributable income falling by a milder 26.5% y-o-y in 1H20 (CDL Hospitality Trusts: -57% y-o-y). Its P/B of 0.65x is one of the lowest in our universe of coverage for S-REITs.
  • Maintain BUY on Far East Hospitality Trust and increase target price to S$0.72.

Far East Hospitality Trust's business from government contracts remains stable.

  • While demand to house returning Singaporeans and foreign visitors serving Stay-home Notices (SHN) has tapered off, the government has channelled the rooms to other usages. These include:
    1. foreign worker decantment (foreign workers housed at hotels to alleviate over-crowding at dormitories),
    2. isolation after swab test (temporary holding area while suspected cases wait for results from their swab tests), and
    3. quarantine for COVID-19 patients with mild symptoms.
  • Overall, buyout contracts from government agencies remained relatively stable. Thus, occupancy for its hotels is expected to remain above 90% in 3Q20.

Slight dip in corporate contracts to house Malaysian workers.

  • Far East Hospitality Trust provides lodging for Malaysian workers stranded in Singapore after Malaysia imposed Movement Control Order (MCO) on 18 Mar 20. The border between Singapore and Malaysia has re-opened on 17 Aug 20 through two schemes, Reciprocal Green Lane (RGL) and Periodic Commuting Arrangement (PCA).
  • Some stranded Malaysian workers have returned home to reunite with their families, which is partially offset by new Malaysian workers finding employment in Singapore through the PCA.
  • We understand that government contracts account for more than 50% of available rooms, while lodging for Malaysian workers accounts for 20-30% of available rooms.

Occupancy at SRs staying resilient.

  • Far East Hospitality Trust’s Serviced Residences (SRs) cater to guests on extended stay and long-term projects. Occupancy for its SR remained high at 81.8% in 2Q20 due to longer leases from corporate accounts. Many corporate customers have extended their leases due to delays to their projects. Corporate customers are able to utilise bilateral Green Lane arrangements to travel to Singapore. Thus, we expect occupancy for SRs to be stable.

Anticipate mild pickup in 4Q20.

  • Travel restrictions remain in place in the near term. Singapore has established bilateral Green Lane arrangements with Brunei, China, Japan, Malaysia and South Korea. However, they are limited to essential business and official travel.
  • All Singaporeans aged 18 years and above will each receive a tourism voucher worth S$100, which can be used to offset cost of hotel stays until end of Jun 21. Singaporeans have to take staycations as they are unable to travel overseas for holidays. The tourism vouchers will stimulate demand for staycations, bringing some respite for hotels during the school holidays in November and December.

Downside protection from high fixed rent component.

  • All Far East Hospitality Trust hotels and SRs are under master lease agreements with companies that are within sponsor Far East Organisation (FEO). The fixed rent component from its master leases for all its properties is S$67m per year, which is equivalent to 72% of total gross revenue from its hotels and SRs in 2019. Its master leases with sponsor FEO will expire in 2032.

Downside protection from attractive P/NAV.

  • Far East Hospitality Trust trades at P/B of 0.65x, one of the lowest in our universe of S-REITs. Trading at a steep 35% discount against NAV/share of S$0.855, we believe the deep discount is unwarranted, given good corporate governance and creditworthiness of its sponsor FEO.

Drawing closer to the anticipated recovery in 2H21.

  • The recovery within the hospitality industry ultimately hinges on the development of an effective COVID-19 vaccine, particularly when it is widely available. We expect a COVID-19 vaccine to be authorised for emergency usage in Nov/Dec 20 and approved for usage by the general public in 1Q21.
  • We expect recovery in the hospitality industry to take place in mid-21 and normalcy to return in 2H21.

Prudent to retain 21.5% of distributable income in 1H20.

  • Far East Hospitality Trust's management estimates the out-of-pocket rental waivers (net of property tax rebate and cash grants provided by the government) for retail and office tenants to be S$2m-3m. We have assumed that Far East Hospitality Trust disburses S$3m of the S$5.5m retained in 4Q20.
  • Our estimated payout ratio for 2020 is 95% (management intends to maintain payout at minimum of 90% of taxable income).

Maintain BUY on Far East Hospitality Trust

  • We have kept our Far East Hospitality Trust's DPU forecasts for 2020F and 2021F relatively unchanged.
  • Far East Hospitality Trust has demonstrated its defensive qualities with distributable income falling by a milder 26.5% y-o-y in 1H20 (CDL Hospitality Trusts: -57% y-o-y). We are also drawing closer to the anticipated recovery in 2H21. Thus, we have lowered our COE from 7.5% to 7.0% (adjusted beta lower from 1.1x to 1.0x). We have also rolled over our valuation to 2021.
  • Our target price is based on DDM (COE: 7.0%, terminal growth: 1.8%). See Far East Hospitality Trust Target Price.

Yielding a rich harvest.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-09-25
SGX Stock Analyst Report BUY MAINTAIN BUY 0.72 UP 0.580