Looking for acquisitions in FY24F
- Management signalled intent to acquire in FY24F – likely in Japan/Singapore.
- Higher hotel & retail occupancy to drive FY24F earnings growth, in our view.
- Reiterate Add on geographical diversification as a re-rating catalyst.
Eyeing acquisitions in FY24F
FEHT’s gearing stood at 31.3% as at end-FY23, translating into a debt headroom of c.S$500m to reach 45% gearing level. In the FY23 analyst briefing, management ranked acquisitions above share buybacks and said it continues to look for acquisitions in Japan given the positive yield spread. Management said asset yields in Japan are in the c.4% range. It said it will wait for interest rates to moderate down, likely in 2H24F, before revisiting acquisitions in Singapore. While assets in Singapore are pricier and come with lower yields, similar to the Oasisa Downtown acquisition, the sponsor could sell its assets with a partial land lease, thereby lowering the purchase value and making the acquisition more accretive for FEHT, in our view.
FY23 same-store revenue at pre-Covid levels
FY23 DPU of 4.09 Scts (+25.1% yoy) was a slight beat to our estimate, at 106.9% of our FY23F forecast due to stronger topline growth and NPI margins (FY23: 92.4% vs. FY19: 90.3%, owning to lower ultilisation rates and operating costs for hotels under government contracts). We see more occupancy-driven recovery for the hotel portfolio in FY24F – FY23 hotel revenue per available room (RevPAR) recovered to 96% of 2019 levels compared to peers’ c.120% as four of FEHT’s hotels were ramping up after exiting their respective government contracts during the year. FY23 serviced residence (SR) RevPAR reached as high as 126% of 2019 levels. Occupancy for the retail and office stood at 80% and 100% respectively, the former depressed due to vacancy at Village Changi which has not been backfilled since the hotel exited its government contract in Mar 23.
Incentive fee on standby to cushion higher interest rates
Cost of debt averaged 3.3% in FY23 while interest coverage ratio stood at 3.5x. FEHT has refinanced c.S$225m of loans maturing in Mar 24 with 3- and 7-year sustainability-linked debt. Management guided for FY24F cost of debt to average c.4% post-refinancing as half of the interest rate hedged (42.6% fixed at end-FY23) will roll off. Given its low interest rate hedge, management said the S$18m additional incentive fee from the divestment of Central Square could be used to cushion the impact of higher interest rates. Nonetheless, we expect interest coverage ratio to fall to c.2.8x in FY24F amid higher interest expense.
Reiterate Add with geographical diversification as re-rating catalyst
Our DDM-TP dips from S$0.77 to S$0.75 as we lower FY24F-25F DPU by 1.5-2.8% to factor in higher interest costs, partially offset by higher NPI margin assumptions. Re-rating catalysts include geographical diversification, accretive acquisitions/divestments and faster ramp-up period for its hotels that have exited government block-booking contracts. Downside risks are lower-than-forecast leisure and/or corporate travel demand, which would impact FEHT’s occupancy and room rates.
