SINGAPORE (Oct 31): DBS Group Research and OCBC Investment Research are maintaining Far East Hospitality Trust (FEHT) at “buy” after 3Q18 results shows further evidence that DPU is on a recovery path.
Gross revenue increased 11.1% y-o-y to $30.5 million, due to an increase in hotel master lease rental and contribution from Oasia Hotel Downtown. Net property income increased 11.8% y-o-y to $27.7 million. Due to higher interest costs mainly due to the Oasia acquisition, 3Q18 DPU increased by a smaller 1.9% y-o-y to 1.05 cents.
3Q18 hotel RevPAR increased 6.6% to $152, mainly due to a 5.1% increase in ADR. Management noted an uptick in overall market demand on the broader front and generally strong leisure demand. Meanwhile, services residences RevPAU decreased 5.4% y-o-y to $186.
Looking ahead, OCBC analyst Deborah Ong expects the current pace of RevPAR growth to continue in the last quarter, before picking up speed in 2019. Feedback from management suggests that mid-tier hotels have outperformed upscale hotels year to date as they are better positioned to benefit from strong leisure demand amid a tepid corporate environment.
For serviced residences, Ong expects the softness to continue for the next few quarters and a flattish performance next year given the low base in 2018.
“Since our upgrade from ‘hold’ to ‘buy’ on Aug 13 to Oct 30’s close, FEHT has posted a -5% total return, outperforming the STI by 4 ppt. After adjustments, our fair value dips from $0.69 to $0.675. Maintain ‘buy’,” says OCBC.
In a separate report, DBS says moderation of growth expectations has led to a correction in FEHT’s share price over the past few months though it believes investor confidence should return as FEHT is showing further evidence that DPU is on a recovery path. In addition, FEHT is attractively priced, trading at roughly 0.7 times FY18F book and 6.8% yield.
“As new hotel supply eases over the next few years, we remain convinced that FEHT is leveraged to a multi-year upturn and FY19 earnings would also benefit from the full year contribution of the recently acquired Oasia Hotel Downtown,” says analyst Mervin Song in a Wednesday report.
Song acknowledges the challenges faced by FEHT’s serviced residences following the reduction in the minimum stay for residential buildings from six to three month as well as the downgrades to earnings expectations given macro uncertainties, however he says this risk has been priced in given that FEHT already trades at a steep discount to book value and the serviced residences only represent 10-12% of revenue.
Song also believes consensus is ignoring the expected recovery in the Singapore hotel portfolio as demonstrated by a 6% y-o-y increase in revenue per available room (RevPAR) in 9M18.
After incorporating a weaker serviced residence performance, DBS is lowering its DCF-based target price to 70 cents from 74 cents.
Year to date, units in FEHT are trading 16.7% lower at 60 cents giving 6.7% yield for FY18F.
