At a price of $1.11 as at July 23, Far East Orchard, a somewhat illiquid stock, is trading at just 0.4 times its last reported net asset value as at December 31, 2020 of $2.72.
In FY2020, earnings were poor as its hospitality business was adversely affected by the pandemic. This was reflected in the 28.1% decline in revenue compared to FY2019, and net loss of $8.9 million in FY2020.
The financial impact would have been more severe if not for contracted business of hotels in Singapore and Australia, for use as government isolation facilities and corporate accommodation requirements for foreign workers, the company said in a results announcement.
Earnings from the group’s purpose-built student accomodation (PBSA) portfolio proved to be resilient, and included a full year’s contribution from the five PBSA assets acquired in 2019.
Far East Orchard expanded into the complementary businesses of hospitality management and healthcare real estate. In 2015, it diversified its real estate portfolio to include purpose-built student accomodation (PBSA) properties in the UK.
Through its hospitality partnerships with The Straits Trading Company and Toga Group, Far East Orchard’s hospitality arm — Far East Hospitality — now owns more than 10 hospitality assets and manages over 100 properties with more than 16,500 rooms in Australia, Denmark, Germany, Hungary, Japan, Malaysia, New Zealand and Singapore.
The PBSA portfolio in the UK comprises more than 3,500 beds in Brighton, Bristol, Leeds, Liverpool, Newcastle upon Tyne and Sheffield. This includes the recently acquired 301‐bed King Square Studios in Bristol in November 2020. Far East Orchard also holds a portfolio of purpose‐built medical suites for lease and for sale in Singapore's medical hub in Novena.
Although the group has had two consecutive years of negative free cash flow, FPA Financial says that Far East Orchard’s discount to NAV is larger than its peers 0.63 times. Adopting a relative valuation approach, FPA reckons that Far East Orchard’s share price should be nearer to $1.714 which translates into 0.63 times its NAV. Even that looks like a stretch unless there is a catalyst, such as the sale of a hotel to realise its book value.
Some market watchers reckon Far East Orchard could be a value trap because it traditionally trades at a steep discount to NAV.
For punters, the caveat is that Far East Orchard is illiquid despite the pick up in volume on July 22 and 23, and for traders, it maybe easier getting in that getting out.
