SINGAPORE (Nov 3): CIMB says Far East Hospitality Trust should see better days ahead as 3Q17 hotel RevPAR inched up by 0.4% y-o-y, the first uptick the hospitality REIT has seen in this downcycle.
“While the headline 3Q17 DPU of 1.03 cents -- or down 8% y-o-y -- was not exactly impressive, we were encouraged by underlying trends,” says analyst Yeo Zhi Bin.
3Q17 hotel RevPAR inched up 0.4% y-o-y to $143. The improvement came from higher occupancy and flattish average daily rate (ADR).
“We believe that due to low base-effect, there could be continued improvements in 4Q17,” adds Yeo.
For serviced residences (SR), while RevPAU (revenue per available unit) declined 3.4% y-o-y on lower occupancy and ADR, there has been a improvement in q-o-q performance.
And although revenue from commercial premises declined 4.5% y-o-y on lower occupancy and marginal decrease in rental rates, the weakness was within CIMB’s expectations.
CIMB has a "hold" with a target price of 69 cents.
Meanwhile, research house DBS is maintaining its “buy” call with a revised target price of 76 cents.
While FEHT’s unit price has jumped 17% since our upgrade to “buy” in May, lead analyst Mervin Song believes 1H17 marked the cyclical low in FEHT’s earnings.
Acknowledging the downward pressure on FEHT’s earnings due to an oversupplied Singapore market, Song says this risk has been priced in given that FEHT already trades at a significant discount to book value.
“In addition, we believe the market is ignoring the expected recovery in the Singapore hospitality market next year,” adds the analyst who expects recovering DPU trend to drive the stock price higher.
FEHT is also said to be engaging its sponsor on potential acquisitions.
With a low gearing of between 32-33% and FEHT starting a dividend reinvestment plan, there is high chance of an acquisition in the next 12-18 months.
“Thus, we have priced in the purchase of Oasia Downtown for $250 million, partially funded with a $70 million equity raising in mid-2018. This results in a 2% accretion to our original FY18-19F DPU estimates,” says Song.
“FEHT is also attractively priced, trading at c.0.80x P/BV and offering a decent 5.8% forward yield,” he adds.
Units in FEHT are trading at 72 cents as at 10.33am.
