In Sept 7 research note, CGS-CIMB Research analysts Eing Kar Mei and Lock Mun Yee have reiterated their “add” call for Far East Hospitality Trust (FEHT) with an unchanged target price of 74.5 cents.
Eing and Lock are positive on FEHT as they view that the market has not priced in the potential divestment of Central Square.
FEHT had received outline advice from the Urban Redevelopment Authority (URA) in relation to the redevelopment of Central Square, which comprises a serviced residence and commercial spaces, back in March.
The way Eing and Lock see it, FEHT will likely divest the asset. “While the REIT is still exploring various options for the site, we believe a divestment is a more likely scenario to pare down its gearing,” they opine.
“FEHT’s gearing has been hovering at the 39% to 41% level since 2018; we believe a lower gearing will provide debt headroom for acquisitions and boost inorganic growth, catalysing the stock,” they add.
In terms of valuation, the analysts believe Central Square could fetch a valuation of at least $300 million or $1,031.60 psf, in view of the potential strong uplift in gross floor area post-redevelopment.
See also: Far East Hospitality Trust posts 6.8% higher DPS of 1.1 cents for 1H21, despite gross revenue and NPI decline
This represents a capital gain of around 50% over its purchase cost of $183 million and around 60% over its last valuation of $198.3 million as at Dec 31, 2020.
Eing and Lock point out that Raffles Education’s corporate building and college campus situated next to Central Square was put up for sale at a guide price of $200 million, or $2,582 per square foot (psf).
“Taking this as a benchmark and the cost of redevelopment into account (including a 20% developer’s margin), our back-of-the envelope calculations indicate that Central Square could fetch $1,500 psf before authority fees,” they remark.
The analysts view that FEHT’s gearing for FY2022 ending December could decrease to some 33%, assuming Central Square is divested in FY2022 for $300 million, with 60% of the net proceeds used to pare down debt. Given this scenario, their FY2022 distribution per unit (DPU) forecast would reduce by 5%.
Nonetheless, Eing and Lock point out that the lower DPU could be offset by a one-off special distribution from the remaining net proceeds.
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Based on their estimates, if FEHT distributes only 5% of the remaining net proceeds of $116 million as a one-off special distribution, their FY2022 DPU forecast would bump up by 6.4% to 2.7 cents, implying a 4.3% yield.
“Our analysis shows that every additional 5% increase in distribution of the remaining net proceeds as dividend will raise our FY2022 DPU by 0.29 scts, which implies 0.5% DPU yield,” they add.
The analysts are also upbeat on FEHT’s inclusion into FTSE EPRA Nareit Global Developed Index from Sept 20, which they view will increase its “investability”, potentially lowering the barrier for accretive acquisitions.
As at 3.56pm, units in FEHT are trading are trading flat at 61.5 cents.