Far East Hospitality Trust Q5T
Price targets:
Citi Research ‘buy’ 70 cents
Maybank Securities ‘buy’ 80 cents
Positive outlook despite higher interest rates
Analysts from Citi Research and Maybank Securities have maintained their “buy” calls for Far East Hospitality Trust (FEHT) with unchanged target prices of 70 cents and 80 cents respectively.
Citi analyst Brandon Lee expects a “strong recovery” for FEHT, with the rebound of its key drivers in 1QFY2023 ended March 31 painting a positive outlook for the REIT despite higher interest rates.
He says that FEHT’s 1QFY2023 business update showed a continued recovery in Singapore’s hospitality sector, with hotel and serviced residences revenue per available room (RevPAR) improving 129% and 28% y-o-y, and forming 95% and 123% of pre-Covid levels in FY2019, driven by robust demand from leisure travellers.
According to him, visitor arrivals to Singapore are expected to improve further in 2023 with the number hitting 2.9 million in 1QFY2023, almost two-thirds of 2019 and on track to reach the full-year target of 12 to 14 million visitors, compared to just 6.3 million in 2022.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents
For the period, the REIT’s hotels saw average occupancy grow 14 percentage points y-o-y to 81.9%, while average daily rates (ADR) increased 89% to $165 on strong demand, further supported by the newly-rebranded Vibe Hotel Singapore Orchard and higher rates from remaining government contracts.
Maybank’s Krishna Guha says the improvement in RevPAR was led by record room rates and a pickup in occupancy, only partially offset by higher borrowing costs, which could lead to a growth in distributions.
“FEHT is poised to benefit from recovering visitor arrivals which should lead to an estimated 30% y-o-y growth in distributions for the year,” says Guha.
See also: Suntec REIT biggest beneficiary from MAS’s ‘looser’ leverage, ICR rules: OCBC
FEHT’s income available for distribution increased 24% y-o-y to $18.2, forming 24.3% of Guha’s full-year estimate but beating Lee’s expectations by making up 28% of his FY2023 forecast.
For 1QFY2023, FEHT’s revenue increased 20% y-o-y to $25.2 million, with net property income (NPI) up by a strong 24% y-o-y to $23.7 million on higher contributions from hotels and commercial properties.
This was mitigated by serviced residences that slipped 8% y-o-y, but still up 10% q-o-q, to $2.7 million due to Central Square’s divestment completion in March 2022. Excluding the divestment of Central Square, serviced residences revenue would have grown 27% y-o-y, says Lee.
Meanwhile, its gearing of 32% implies a debt headroom of some $308 million before it would 40%. This is accompanied by a higher interest rate of 3.2% and a significantly lower fixed-rate debt proportion of 47.3%, which ranks as the lowest among S-REITs under Citi’s coverage, which could exert upside and downside risks to debt cost and interest coverage ratio (ICR), says Lee.
“While current interest and cap rates make deals difficult, opportunities exist from sponsor’s pipeline and third-party assets in geographies with a good spread,” adds Guha.
He has raised his FY2023 distribution per unit (DPU) estimates by 1% while lowering his FY2024 DPU forecast by 3% with a higher top line offset by higher borrowing cost and units on issue to account for fee-related issuance of management units. “Our new forecasts imply 32% DPU growth for FY2023 and a dividend yield of 6%, which we view favourably,” says the Maybank analyst.
Although FEHT has underperformed S-REITs by some 2% year to date, Lee says more properties in its portfolio are expected to perform above fixed rents and achieve variable rents. — Bryan Wu
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Singapore Technologies Engineering S63
Price target:
RHB Bank Singapore ‘buy’ $4.05
Special investment opportunity
RHB Bank Singapore’s Shekhar Jaiswal continues to call Singapore Technologies Engineering (ST Engineering) a “buy”.
Jaiswal says the defence and engineering conglomerate’s combination of defensive yield and strong earnings growth make the stock a “special investment opportunity”.
However, revised financing costs assumptions will weigh down earnings forecast slightly by 2%, says Jaiswal in his May 9 note, trimming his target price from $4.10 to $4.05.
ST Engineering will see potential upside from its commercial aerospace segment, on the back of a recovery in global aviation traffic, he adds.
Its urban solutions segment will see “strong growth” from Transcore, its US-based traffic management systems unit.
In addition, the defence segment will benefit from higher spending in Singapore and in the US.
Jaiswal acknowledges that investors are worried about the company’s debt load, incurred to fund the acquisition of Transcore.
Nonetheless, he believes the concerns should be allayed by the company’s capacity to produce a significant free cash flow.
He expects a “gradual” drop in the company’s gearing from the current FY2023 to FY2025. ST Engineering’s full year ends in December.
“We think that Moody’s recent reinforcement of its AAA issuer rating — the highest rating level offered by the credit rating agency — should allay investor worries about ST Engineering’s elevated debt levels,” writes Jaiswal. — The Edge Singapore
Food Empire Holdings F03
Price target:
Maybank Securities ‘buy’ $1.29
Good start to the year
Maybank Securities is keeping its “buy” recommendation on coffee manufacturer and distributor Food Empire with an unchanged target price of $1.29.
Ahead of the group’s 1QFY2023 ended March results to be reported after the market closes on May 12, analysts Jarick Seet and Eric Ong expect revenue to increase by 5% y-o-y to US$86.7 million ($11.5 billion) and net profit after tax (NPAT) to gain 22% y-o-y to US$11.2 million. This is especially given that the Russia-Ukraine war started in 1Q2022 and hurt the group’s operations.
“We expect demand to remain strong in Russia and the CIS region and strong growth from Vietnam. Spray dry and new freeze dry coffee plants in India continue to operate at full capacity but should yield higher margins due to cost reductions on freight cost normalisation,” say Seet and Ong.
“Corporate share buy-backs have also been consistent and will likely resume after the blackout period given it has just renewed its mandate,” they add.
The group has been buying back shares from the open market at higher prices than before of over $1.01. The analysts expect this to continue as management concur that the company is deeply undervalued and remains confident of its outlook.
“We also expect interim dividends to be a possibility in the near future due to its strong cash flow generation and strong balance sheet,” say the analysts.
At this point, shares in Food Empire are trading at an undemanding 8.6x FY2023 P/E, which the analysts believe is still a steep discount despite its strong recent share price performance, compared to the valuations of its private and listed global peers.
“As such, we think that it could be an attractive target for bigger competitors given its strong presence in Russia and Vietnam,” they add. — Samantha Chiew
