DBS Group Research’s Chung Wei Le and Derek Tan have maintained their “buy” call on Far East Orchard, along with an unchanged target price of $1.70.
See: Far East Orchard's losses widen to $1.9 million in 1HFY21 as Covid-19 rages on
According to them, the stock holds “deep value” and there are “compelling reasons to trade higher.”
They note that Far East Orchard is currently trading at a 12-month trailing price to book (P/B) multiple of 0.41 times.
This is at a deep discount to its hospitality peers (0.82 times), purpose-built student accommodation (PBSA) peers (0.66 times), and historical average, trading at -0.43 standard deviation (s.d.) of its four-year historical mean.
But as the stock pivots away from the lumpy residential business into recurring income-focused businesses (Hospitality and PBSA), they believe that earnings volatility will minimise and the stock should re-rate higher.
Chung and Tan forecast earnings before interest and taxes (EBIT) from PBSA to grow at a CAGR of 21.6% from FY2020-FY2025.
It plans to expand the number of PBSA beds from 3,561 to 5,000 in 2025, and the analysts highlight that “This asset class has shown resilience against economic downturns and we believe that this segment will be FEOR’s main growth engine in the next few years.”
Furthermore, the recovery in its hospitality segment is expected to boost earnings in FY2021 and FY2022.
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They write, “We believe that the gradual return of leisure travel in Singapore is imminent with Singapore’s high vaccination rate and its ongoing discussions to establish travel corridors.”
Far East Orchard also aims to add about 8,500 hotel rooms by 2025, and based on their estimates, this could translate to about $32 million and $7 million of additional revenue and EBIT respectively.
They warn, however, that the main risk is the worsening of the Covid-19 situation, which could defer or deter any planned potential leisure travel, affecting Far East Orchard’s hospitality business.
As of 4 pm, shares of Far East Orchard traded at $1.11, with an FY2021 dividend yield of 2.7%.
Photo: Far East Orchard
