Unearthing hidden gold from its portfolio

  • Sale of Central Square at c.58% premium-to-book a pleasant surprise, exceeds our estimates  
  • Exit yield of c.1.8% (FY20 basis), balance sheet gearing to drop to c.33.5%, significant capacity for acquisitions 
  • P/NAV valuations to drop to 0.7x on a forward basis, – 1 standard deviation, an attractive re-entry point 
  • BUY call maintained, TP raised to S$0.78 

Investment Thesis

Attractive earnings floor provides downside protection. FEHT currently trades at an attractive valuation, offering investors a FY22-23F CAGR of 25% in distributions to c.6.9% as travel resumes on its path to normalcy. While the Omicron strain threatens to be a party pooper, we are comforted by FEHT’s downside protection with a significant part of its revenues on fixed rental basis, supported by its sponsor. 

Sale of Village Residence Clarke Quay crystallised NAV.  We believe that the market has not priced in the sale of the property that accounts for 8% of its assets. The transacted price at c.58% premium to NAV is a surprise and a key catalyst for the stock. Gearing will drop to c.33.%, empowering the REIT with gearing capacity to fund acquisitions. 
 
Robust rebound in earnings. Overall portfolio metrics should recover in FY22F-23F, where we see an acceleration in momentum post vaccine distribution. Our numbers remain conservative and below consensus as we have pencilled in our latest estimates (after cutting FY21-22F estimates by 4-7%) on the back of a projected 4-year normalisation trend. 

Valuation:

Our RevPAR assumptions are for a stronger rebound in FY22 with DPU at 90% of pre-COVID levels. Our TP is raised to S$0.78 as we roll forward valuations. 

Where we differ:

Our estimates are more aggressive as we believe Singapore-focused S-REITs will recover strongly. 

Key Risks to Our View:

A slower recovery in FY21 (if the COVID-19 pandemic drags on) could pose a major risk.