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Analysts positive on FEHT after recent divestment of Central Square

Lim Hui Jie
Lim Hui Jie12/3/2021 04:57 PM GMT+08  • 3 min read
Analysts positive on FEHT after recent divestment of Central Square
DBS has raised its target price, while CGS-CIMB kept theirs unchanged.
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Analysts from both CGS-CIMB Research and DBS Group Research have kept their “buy” or “add” calls on Far East Hospitality Trust (FEHT), with DBS raising their target price..

DBS’s Geraldine Wong and Derek Tan have handed the stock a target price of 78 cents, up from their previous target price of 70 cents, while CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee maintain their target price of 74.5 cents.

FEHT entered into a put and call option agreement with City Developments Limited (CDL) subsidiary CDL Constellation, to divest its interest in Central Square (CS) for $313.2 million, plus an incentive fee of up to $18 million.

This is subject to certain conditions being fulfilled by Dec 31, 2023, including getting provisional permission for a higher mix of residential use.

The divestment consideration represents a 57.9% premium to the independent valuation of $198.3 million (as at Dec 31, 2020) and a 70.8% premium to the original purchase price of $183.3 million in Aug 2012.

After accounting for transaction-related costs, FEHT expects a net gain of $112 million, with the divestment expected to be completed by end 1Q 2022.

Eing and Lock write in a Dec 3 report that divestment is the best strategy for the REIT, saying the announcement did not come as a surprise.

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This is because FEHT had previously said it is exploring various options for Central Square, after it received outline advice from the Urban Redevelopment Authority to redevelop the property.

However, under the strategic development incentive scheme, Central Square could be redeveloped up to a maximum gross floor area (GFA) of 31,758 sq meters, 75% more compared to the current GFA of 17,858 sq meters and to a height of 20 storeys from seven storeys currently.

“Considering the long redevelopment gestation period and that a REIT has [a] 10% development limit, FEHT concluded that a divestment via a tender exercise is the best strategy for the REIT,” the analysts say.

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The proceeds from the divestment will be used to pare down FEHT’s debt.

Eing and Lock say that assuming 83.9% of the divestment net proceeds are used to pay down debt, FEHT’s gearing will be significantly reduced from 41.3% (as at June 30) to 33.5%, while its debt headroom will be increased to $533.6 million, based on the 45% gearing limit.

This will provide FEHT flexibility in acquisitions, and while Central Square accounted for about 8% of FEHT’s 2020 assets under management (AUM), the divestment will increase its pro forma net asset value (NAV) per unit by 7.2% and DPU by 0.8% due to interest savings.

As for the DBS analysts, they point out that FEHT currently trades at an attractive valuation, offering investors a FY2022-2023 compounded annual growth rate (CAGR) of 25% in distributions of about 6.9% as travel resumes on its path to normalcy.

“While the Omicron strain threatens to be a party pooper, we are comforted by FEHT’s downside protection with a significant part of its revenues on fixed rental basis, supported by its sponsor.”

They think overall portfolio metrics should recover in FY2022-23, where we see an acceleration in momentum post vaccine distribution.

However, they warn that a slower recovery in FY2021 - if the Covid-19 pandemic drags on - could pose a major risk.

As at 4.52 pm, shares of FEHT are trading at 59.5 cents, with a FY2021 price to book ratio of 0.73 times and dividend yield of 4.34%, according to CGS-CIMB.

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