Far East Hospitality Trust - CGS-CIMB Research 2021-09-07: Central Square To Reap Substantial Gains?

SGinvestors.io

FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Far East Hospitality Trust - Central Square To Reap Substantial Gains?

• Central Square is up for redevelopment. Disposal could be a likely scenario.
• Disposal could reap strong gains of 50% given the uplift in GFA, in our view.
• Reiterate ADD on Far East Hospitality Trust. We believe market has not priced in the potential divestment.

Divestment of Central Square a likely scenario

• Central Square (CQ) is slated for a redevelopment, which would see a potential rezoning and uplift in its GFA. While Far East Hospitality Trust is still exploring various options for the site, we believe a divestment is a more likely scenario to pare down its gearing. We understand that Far East Hospitality Trust has slowed down leasing activities for this property to make way for the redevelopment.

Asset could be priced substantially above valuation

• Based on the property’s FY20 valuation, we believe Central Square (CQ) could fetch a minimal valuation of S$300m or S$1,031.6 psf, considering the potential strong uplift in GFA. This represents a substantial ~60% and ~50% capital gain over its purchase cost of S$183m and last valuation of S$198.3m (as at 31 Dec 2020), respectively.
• Recently, Raffles Education (SGX:NR7)’s corporate building and college campus situated next to CQ was put up for sale at a guide price of S$200m, or S$2,582 psf. Taking this as a benchmark and the cost of redevelopment into account (including a 20% developer’s margin), our back-of-the envelope calculations indicate that CS could fetch S$1,500 psf before authority fees.

Potential sale proceeds to reward shareholders and reduce gearing

• Assuming that Central Square (~8% of Far East Hospitality Trust's total portfolio value) is offset by a one-off special distribution from the remaining net proceeds.
• See
  • Far East Hospitality Trust's Share Price,
  • Far East Hospitality Trust's Target Price,
  • Far East Hospitality Trust's Analyst Reports,
  • Far East Hospitality Trust's Dividend History,
  • Far East Hospitality Trust's Announcements,
  • Far East Hospitality Trust's Latest News.
• Assuming Far East Hospitality Trust distributes only 5% of the remaining 0.5% DPU yield.

Reiterate ADD on Far East Hospitality Trust, with an unchanged DDM-based target price

• We believe the market has not priced in thelease income, which works out to ~S$0.02 DPU, implying a 3.3% yield.
• Potential re-rating catalyst/downside risk: stronger RevPAR/weaker income from commercial segment.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2021-09-07

SGX Stock Analyst Report ADD MAINTAIN ADD 0.745 SAME 0.745