August 8, 2017

We believe 1H17 marks the cyclical low in Far East Hospitality Trust (FEHT)’s earnings, and FEHT should report sequential improvements in DPU going forward as we approach 2018, when the overall Singapore hospitality market should start its upturn. In addition, FEHT’s valuations are attractive, trading at c.0.75x P/BV and offering a high 6.1% yield.

Consensus is currently recommending investors to avoid FEHT given an expected near term decline in DPU. While acknowledging the downward pressure on FEHT’s earnings due to an oversupplied Singapore market, in our view, 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. The recovery has failed to materalise over the past two years due to new supply being pushed back, which we do not expect to occur ahead.

We understand FEHT is actively engaging its Sponsor on potential acquisitions. With a low gearing of between 32-33% and FEHT initiating a dividend reinvestment plan which its Sponsor has indicated it would participate in, we believe there is high chance of an acquisition over the coming 12-18 months. In our opinion, the market is unprepared for this positive surprise, which should act as a further re-rating catalyst.

After rolling forward our valuation to FY18, we raised our DCF-based TP from S$0.66 to S$0.70, BUY. The risk to our positive view would arise from a deep contraction this year or delay in recovery of the Singapore hospitality market next year. –DBS

 

Far East Hospitality Trust closed at: S$0.670