Far East Orchard - DBS Research 2021-08-05: Poised To Rerate As Earnings Bottom

FAR EAST ORCHARD LIMITED (SGX:O10)

Far East Orchard - Poised To Rerate As Earnings Bottom

Far East Orchard (SGX:O10) reported 1H21 net loss of S$5.9m due to a weak Hospitality segment.
PBSA EBIT rose 29.1% y-o-y to S$12.8m.
FEOR is trading at 0.41x P/B, at a deep discount to hospitality and PBSA peers.
Maintain BUY with unchanged target price of S$1.70.

Far East Orchard's weaker than expected results was mainly due to continued impact from COVID-19 on its hospitality segment. Revenue from its Hospitality segment declined 23.7% y-o-y to S$29.9m and the segment reported a net loss of S$10.1m. In Singapore, the decline was partially mitigated by the demand for accommodation facilities for isolation purposes and demand from companies for accommodation for their foreign workers.
Purpose-built student accommodation (PBSA) segment doing well, achieving higher revenue and EBIT. Far East Orchard’s PBSA segment continued to demonstrate its resiliency as its portfolio occupancy remained above 80%. Since mid-May, all higher education students were allowed to return to in-person teaching and the UK government has also announced that there will be no restrictions on in-person teaching and learning in universities from 16 August.
Revenue and EBIT from this segment grew 34.5% and 29.1% y-o-y to S$20.5m and S$12.8m respectively. We believe that this was mainly due to higher occupancies as well as the full contribution from the newly acquired King Square Studios in November 2020.

Despite the ongoing COVID-19 pandemic and uncertainty in the resumption of international travel, we believe that we are on the cusp of a return of leisure travel in Singapore, albeit at a small scale. The Singapore government aims to have 75% of its population fully vaccinated by October so that it can gradually ease border restrictions as COVID-19 becomes endemic over time. It has hinted of possible leisure travel by year end and is in talks with various countries to establish leisure travel corridors.

Amidst a challenging operating environment for its Hospitality segment, we believe FEOR’s PBSA segment will continue to shine and drive EBIT. Demand for higher education in the UK remains robust, increasing 4% y-o-y in Academic Year (AY) 21/22. Higher education UK students are also allowed to return, and Far East Orchard’s portfolio occupancy should stay above 80%. We are projecting EBIT contribution from its PBSA segment to grow at a CAGR of 21.6% from FY20-25F.

Far East Orchard is attractively valued, trading at a TTM P/B multiple of 0.41x, which is at a discount to its hospitality peers (0.82x), PBSA peers (0.66x), and historical average (-0.43 standard deviation of its 4-year historical mean).
Furthermore, with a pivot away from the lumpy residential business into more recurring income-focused businesses (Hospitality and PBSA), we believe that earnings volatility will be greatly minimized and Far East Orchard should re-rate higher.

We revise Far East Orchard's FY21F/22F earnings forecast down as we adjust for the weakness in its Hospitality segment. We have lowered our assumptions for occupancy rates and room rates at its Hospitality segment in FY21F/22F to factor in the slower-than-anticipated recovery. We have also revised up our occupancy rate assumption for its PBSA portfolio to factor in the stronger results from that segment.
Maintain BUY rating on Far East Orchard and with an unchanged target price of S$1.70. We continue to see deep value in Far East Orchard and believe that it should re-rate higher given its re-focus towards growing its recurring income segments. Our target price of S$1.70 for Far East Orchard is based on the average of
1. its 10-year discounted cash flow (DCF) valuation followed by a 10-year transition using the H-Model, and
2. 0.60x FY21F P/B multiple.
See

Wei Le CHUNG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-08-05

SGX Stock Analyst Report BUY MAINTAIN BUY 1.70 SAME 1.70