Slowly but steadily, UOB Kay Hian is expecting a recovery for Far East Hospitality Trust (FEHT). Despite the hospitality sector being the hardest hit by the Covid-19 pandemic with the lack of tourists coming into Singapore, the research house is maintaining its “buy” call on FEHT with an increased target price of 72 cents from 58 cents previously.
In a September 25 report, lead analyst Jonathan Koh is keeping positive on the stock.
“We expect contributions from government contracts to remain stable in 3Q20, followed by a mild pickup boosted by Singaporeans going for staycations in 4Q20. We expect recovery to take place in mid-21 and normalcy to return in 2H21," he says.
While demand to house returning Singaporeans and foreign visitors serving Stay-home Notices (SHN) has tapered off, the government has channelled the rooms to other usages. These include foreign worker decantment (foreign workers housed at hotels to alleviate over-crowding at dormitories); isolation after swab test (temporary holding area while suspected cases wait for results from their swab tests); and quarantine for Covid-19 patients with mild symptoms.
Overall, buyout contracts from government agencies are expected to remain relatively stable, with occupancy for FEHT’s hotels expected to remain above 90% in 3Q20.
These government contracts account for more than 50% of FEHT’s available rooms, while the other 20% to 30% accounts for rooms provided to Malaysian workers stranded in Singapore after Malaysia imposed the Movement Control Order (MCO).
Since the borders between Singapore and Malaysia have partially opened on August 17, some stranded Malaysian workers have returned home to reunite with their families, but this is partially offset by new Malaysian workers finding employment in Singapore through the PCA.
Meanwhile, FEHT’s Serviced Residences (SR) cater to guests on extended stay and long-term projects. Occupancy for its SR remained high at 81.8% in 2Q20 due to longer leases from corporate accounts, as many corporate customers have extended their leases due to delays to their projects.
With corporate customers being able to utilise the bilateral Green Lane arrangements to travel to Singapore, Koh expects SR occupancy to remain stable.
Although the borders are slowly opening up, leisure travels are still prohibited. And with Singaporeans aged 18 and above set to receive $100 in tourism vouchers, which can be used to offset the cost of hotel staycations, Koh believes that this will provide some respite for hotels during the school holidays in November and December.
Ultimately, the recovery of the hospitality industry hinges on the development of an effective Covid-19 vaccine, particularly when it is widely available. Koh expects a vaccine to be authorised for emergency usage in November or December, and approved for usage by the general public in 1Q21.
Currently, FEHT is trading at a price-to-book ratio of 6.5 times, one of the lowest in UOBKH’s universe of S-REITs. “Trading at a steep 35% discount against NAV/share of 85.5 cents, we believe the deep discount is unwarranted, given good corporate governance and creditworthiness of its sponsor FEO,” adds Koh.
The stock also provides an attractive FY21 distribution yield of 5.6%. Its yield spread is 4.7% above 10-year government bond yield of 0.9%, which is 1SD above its long-term mean.
As at 1.22pm, units in FEHT are trading at 56 cents.