Far East Hospitality Trust - DBS Research 2020-12-01: Paid While Waiting Out A Recovery

FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Far East Hospitality Trust - Paid While Waiting Out A Recovery

Pent-up travel demand to drive a “V-shaped” recovery in the sector.
Singapore’s gradual reopening of its borders to prevent a resurgence in COVID-19 cases a sustainable strategy.
Near-term staycation demand to compensate for fall-off in government quarantine business.
BUY maintained for Far East Hospitality Trust, target price raised to S$0.70 on lower WACC assumptions.

While we believe that 2021 brings much promise for the hospitality sector, the growth trajectory will likely differ drastically between markets and hospitality asset types. Given that most governments will likely be more cautious and gradual in their plans to reopen their borders to international tourists post the mass distribution of a vaccine, before that happens, the focus will be on domestic travel markets. Therefore, markets like China, Japan, Europe, US and Australia, which have deeper domestic market demand, will recover first.
Destinations with a focus on international travel, like Singapore, while starting to reopen their borders in 4Q20 to selected countries, will most likely see a more lagged pace of recovery.

Far East Hospitality Trust (SGX:Q5T) is a pure play Singapore S-REITs. While it is not able to capture domestic demand in overseas markets, Singapore remains on a firm footing as she opens her borders selectively to international business travel and tourists through “green lanes” and “travel bubbles.
The path back to pre-COVID levels may be a couple of years away, but we are optimistic on this forward growth trajectory in distributions (or distributions per unit [DPU]) which should accelerate upon the mass distribution of a vaccine globally. We conservatively assume a 4-year trajectory back to normalcy in our estimates (though front-end-loaded growth) but acknowledge that this timing remains fluid for now and our estimates reflect these updated sector estimates.
In our scenario analysis of a 68%/ 89%/ 95%/ 100% catch-up in RevPARs compared to pre-COVID levels in our models, Far East Hospitality Trust should achieve c.90% of its pre-COVID-19 DPU by FY22, driven by a mix of organic growth and acquisitions. In a more bullish scenario, Far East Hospitality Trust may exceed its pre-COVID-19 DPU by FY22.

Far East Hospitality Trust offers an attractive 4.4% forward yield with c.90% of rental income for FY21 supported by fixed master lease rents from sponsor and Far East Hospitality Trust's commercial assets.

Far East Hospitality Trust’s hotels that are currently block-booked by the government may taper off towards end-2020; and will be opened for staycation bookings. We anticipate this to benefit selected hotels that are uniquely positioned in this segment, such as The Barracks Hotel in Sentosa.

Overall portfolio metrics should recover in FY21F-22F, where we see an acceleration post a vaccine distribution. Our numbers remain conservative and below consensus as we reflect our latest estimates (cut FY21-22F estimates by 17%- 21%) on a projected 4-year normalisation trend.

Our estimates are more conservative as we believe Singapore-focused S-REITs will recover later than peers. That said, its revenue structure should support downside to earnings.
See also Singapore Hospitality REITs - DBS Research 2020-12-01: Waiting For Lift-Off.

Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-12-01

SGX Stock Analyst Report BUY MAINTAIN BUY 0.700 UP 0.60