SINGAPORE (June 15): CIMB Research is maintaining its “hold” call on Far East Hospitality Trust (FEHT) on an “as is” basis with a higher price target of 63 cents from 57 cents previously due to a sector-wide fall in Singapore’s discount rate.
In a Wednesday report, analysts Yeo Zhi Bin and Lock Mun Yee recommend FEHT as a tactical trade with relatively better returns as compared to that of CDL Hospitality Trusts (CD REIT) – as projected total returns for CD REIT have been revised to 0%, whereas FEHT has an estimated 9%.
CD REIT has been rated “hold” with a $1.52 price target.
“We note that CD REIT is the only hotel Singapore REIT which is trading above book value, which suggests that the Singapore hotel recovery story has been priced in. For a tactical trade, we recommend investors switch to FEHT, which is trading at 0.72x current P/BV and 6.4% FY18 dividend yield,” elaborate the analysts.
Further, they believe there are near-term catalysts for FEHT beyond relative valuations, including the possible acquisition of its sponsor’s (Far East Organisation) 314-room Osia downtown property.
“Given that FEHT’s gearing at end-1Q17 stood at 32.3%, we believe that the manager could lean towards debt for any potential acquisition. Assuming fully-debt funded acquisition at 2.5% interest cost vs. net property income (NPI) entry yields of 4.5-6% for acquisition size of $225-300 million, we estimate 4.5-12% accretion to FY18F distribution per unit (DPU),” say Lock and Yeo.
The analysts are expecting FEHT’s 2Q17 results to hold up on a quarterly basis, with improvement in the occupancy of its serviced residences (SRs) as well as low-to-mid single-digit decline in hotel revenue per available room (RevPAR).
“Recall that the 1Q17 results miss was due more to weakness from SRs than hotels. However, we understand that there have been some improvements since. Furthermore, we are optimistic of a relatively stable hotel performance due to low base effects,” they note.
“We reiterate our view that Singapore hospitality market will bottom out by end-17F and recover in 2018F. That said, the path to recovery is never smooth,” add the analysts.
“We now expect FEHT’s hotel portfolio to post 4.4% yoy RevPAR decline in FY17F, and 3% yoy improvement in FY18F. The outlook for SRs, however, is more tempered. We now expect SRs to post 7.8% yoy RevPAU decline in FY17F, and 5.6% yoy improvement in FY18F.With the change in assumptions, our FY17F-19F DPUs decrease by 0.9-1.8%.”
As at 2.54pm, units of FEHT are trading 0.7% lower at 64 cents.
