SINGAPORE (May 16): DBS Vickers is upgrading its call on Far East Hospitality Trust (FEHT) to “buy” from “hold”, raising its target price on the stock to 66 cents from 63 cents previously on expectations of a market recovery from 2018 onward.
(See also: Far East Hospitality Trust’s DPS sinks 13.9% to 0.93 cents in 1Q on lower revenue)
The move contradicts consensus, which is currently recommending investors to avoid the REIT given an unexpected decline in distribution per unit (DPU) over the latest quarter.
In a Tuesday report, analysts Mervin Song and Derek Tan acknowledge the downward pressure on FEHT’s earnings due to oversupply in the Singapore market, but opine that this risk has already been priced in given that the trust already trades at a significant discount to book value.
“In addition, we believe the market is ignoring the expected recovery in the Singapore hospitality market next year. While a recovery has failed to materalise over the past two years due to new supply being pushed back, we do not expect this to occur,” they elaborate.
With a low gearing of 32% and FEHT initiating a dividend reinvestment plan which its sponsor has indicated it would participated in, Song and Tan also believe there is a high chance of an acquisition over the coming 12-18 months – a positive surprise which the analysts think the market is unprepared for.
The research house is hence assuming a target gearing of 36% versus 32% previously to better reflect assumptions of FEHT moving towards a more efficient capital structure.
“With only seven months till 2018, the year in which we expect the Singapore hospitality market to turnaround, we believe now is the opportune time to increase exposure to FEHT ahead of a recovery in its DPU,” say Song and Tan.
“FEHT’s valuation is attractive at c.0.7x P/BV and offers 6.6% yield.”
As at 12.51pm, units of FEHT are trading flat at 60 cents.
