Far East Hospitality Trust

Price target:

UOB Kay Hian “buy” $0.72 Lift from government contracts and staycations

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, the research house is maintaining its “buy” call on FEHT with an increased target price of 72 cents, from 58 cents previously.

“We expect contributions from government contracts to remain stable in 3QFY2020, followed by a mild pickup boosted by Singaporeans going for staycations in 4QFY2020. We expect recovery to take place in mid2021 and normalcy to return in 2HFY2021,” writes lead analyst Jonathan Koh in his Sept 25 report.

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, such as foreign worker decampment and quarantine for those with mild symptoms.

With government contracts accounting for more than 50% of available rooms in hotels — 20% to 30% of which are being used to house stranded Malaysian workers — FEHT can expect an occupancy of above 90% in 3QFY2020.

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 2QFY2020 due to longer leases from corporate accounts. This is because many corporate customers have extended their leases due to delays to their projects.

With these customers being able to utilise the bilateral Green Lane arrangements to travel to Singapore, Koh expects SR occupancy to remain stable.

Ultimately, the recovery of the hospitality industry hinges on the development of an effective Covid-19 vaccine. Koh expects a vaccine to be authorised for emergency usage in November or December, and approved for usage by the general public in 1QFY2021.

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 Far East Organization (FEO),” adds Koh.

The stock also provides an attractive FY2021 distribution yield of 5.6%. Its yield spread is 4.7% above 10-year government bond yield of 0.9%, which is 1 standard deviation (SD) above its long-term mean. — Samantha Chiew