DBS Group Research has initiated “buy” on Far East Orchard Limited (FEOR) with a target price of $1.70.
To analysts Chung Wei Le and Derek Tan, the counter, which is currently trading at a trailing 12 months (TTM) price-to-book (P/B) multiple of 0.40 times, which is at a discount to its hospitality peers at 0.81 times.
FEOR’s P/B is also considered low next to its purpose-built student accommodation (PBSA) peers with an average of 0.64 times P/B, as well as its own historical average at -0.54 standard deviation (s.d.) of its four-year historical mean.
In their report dated July 26, Chung and Tan deem the group’s pivot away from its “lumpy residential business” into a more recurring income focus from its hospitality and PBSA portfolio as positive, as it will see minimised earnings volatility.
“With greater earnings visibility, we expect the group to return to a “REIT-like” payout of 6 cents per share in FY2022, translating to a yield of 5.5%,” they write.
With FEOR’s ambition to be a significant player in the PBSA field, an asset class which has shown resilience against economic downturns, Chung and Tan believe that the business will be the group’s main growth engine “in the next few years”.
On this, they project its EBIT to grow at a compound annual growth rate (CAGR) of 19.6% from FY2020 to FY2025, and in the medium term, contributing to 55% of its EBIT in FY2025.
The gradual return of leisure travel in Singapore could also boost FEOR’s earnings in the FY2021/FY2022, note the analysts.
This, they say, could translate into $32 million and $7 million of additional revenue and EBIT.
Shares in FEOR closed 1 cent lower or 0.9% down at $1.14 on July 27, or 0.4 times P/B, according to DBS’s estimates.
Photo: FEOR
