Early bird catches the worm
- Divestment of Central Square expected to lift NAV towards multi-year high of c. S$0.90/share
- Lowest geared hospitality REIT at c.33% with ability to surprise on acquisitions.
- Higher RevPAR has shown a strong correlation to higher P/NAV multiples, with upside to come from revaluations at end-FY22.
- Maintain BUY, TP unchanged at S$0.78
Investment Thesis
Compelling reasons to enter early. We see compelling reasons to be an “early bird” with imminent catalysts driving to narrow P/NAV gap in the coming years. FEHT currently trades at an attractive valuation, offering investors a FY22-23F CAGR of 15% in DPUs and a pure-play proxy to Singapore’s border re-opening and recovery towards living in an endemic COVID-19 world.
Critical factor 1: NAV to jump c.5%-6% by end 2022, strong correlation with RevPAR recovery. We believe that markets have not priced in the NAV uplift from the completion of Central Square divestment at a c.58% premium to NAV. This will drive NAV higher and coupled with revaluation gains as RevPAR recovers, we see NAV hitting a multi-year high of S$0.91, bringing its P/NAV down to 0.65x, below historical average, which is close to levels where industry is seeing operational headwinds. Gearing will also drop towards c.33%, which will make FEHT one of the least geared REIT, providing headroom for future acquisitions.
Critical factor 2: DPU recovery as variable rents kicks in. With borders re-opening, hoteliers may be able to raise rates and we project RevPAR to double in FY21 and improve a further 40% in FY23, and drive a DPU CAGR of 15% to near pre-COVID levels. As such, we see stock trading closer towards P/NAV of 0.8x-0.85x level, similar to pre-COVID levels, which offers upside of >20%.
Valuation:
We reduce our RevPAR recovery trajectory to c.70% of pre-COVID levels for FY22, while pricing in the repayment of debt in mid-22. Target price unchanged at S$0.78.
Where we differ:
Asia border reopening and return of MICE events in 1H22 ahead of expectations to propel sector recovery.
Key Risks to Our View:
A slower recovery in FY22 (if the COVID-19 pandemic drags on) could pose a major risk.