Management Upbeat on Hospitality Business

Singapore Property Analyst

Anni Kum

Equity Bottom-Up

A potential value play, Far East Orchard trades at 50% discount to its NAV and is near its 52-week low. The downside seems limited; its peers are trading at an average price-to-book of 0.7x and dividend yield of 2.7%. Far East Orchard’s consistent dividend of S$0.06 (4%-yield) per annum is a sweetener. Far East Orchard’s bread and butter are in its hospitality management services business in Australia and Singapore, with sporadic windfalls from its often sell-out residential/commercial property development projects in Singapore. It also has a unique investment portfolio comprising healthcare assets in Singapore and purpose-built student accommodation in the United Kingdom. Australia and Singapore contribute 80% to its top line in FYE Dec 2016, and these are where 87% of the value of its total non-current assets is based.Far East Orchard has consistently paid out a dividend of S$0.06 per share (4% dividend yield) over the last five financial years, with dividend cover of 1.8x on average. Net gearing is negligible given the nature of its asset-light business model. Asset efficiency is low but appears to be improving; return on assets and operating margins of the hospitality management services and operations in Australia and Singapore are showing a positive upward trend. The Group’s diversification into the purpose-built student accommodation (PBSA) segment is a positive development, though it could be challenging to scale up given the size of its balance sheet. Setting up a trust and raising funds would speed up the process if indeed PBSA is part of its long-term strategy (currently about 612 rooms in its portfolio). PBSA is an up-and-coming segment that the big players like Mapletree Investments Pte Ltd have entered into boldly (18,000 beds in UK, US, Canada). Even Wee Hur Holdings Limited, a small-cap contractor/developer is making inroads into the PBSA segment in a big way.   The upcoming FY2017 results may see revenue decline in excess of 20% and net profit plunge 80% year-on-year based on my estimate. This decline is due to the weaker performance of certain hotel assets in Perth and the absence of profit recognition from the sale of the joint venture property development project, RiverTree Residences.  Looking beyond the blip in earnings, the 1) continual improvement in margins from its hospitality operations and management services business, 2) profit recognition of its property development projects in Singapore (Woods Square), Australia (Harbourfront Balmain) and the UK (Greycoat Place London), 4) any improvement in asset efficiency metric, and 4) a potential expansion of their development landbank in Singapore, are potential catalysts for a re-rating.

A potential value play, Far East Orchard trades at 50% discount to its NAV and is near its 52-week low. The downside seems limited; its peers are trading at an average price-to-book of 0.7x and dividend yield of 2.7%. Far East Orchard’s consistent dividend of S$0.06 (4%-yield) per annum is a sweetener. Far East Orchard’s bread and butter are in its hospitality management services business in Australia and Singapore, with sporadic windfalls from its often sell-out residential/commercial property development projects in Singapore. It also has a unique investment portfolio comprising healthcare assets in Singapore and purpose-built student accommodation in the United Kingdom. Australia and Singapore contribute 80% to its top line in FYE Dec 2016, and these are where 87% of the value of its total non-current assets is based.Far East Orchard has consistently paid out a dividend of S$0.06 per share (4% dividend yield) over the last five financial years, with dividend cover of 1.8x on average. Net gearing is negligible given the nature of its asset-light business model. Asset efficiency is low but appears to be improving; return on assets and operating margins of the hospitality management services and operations in Australia and Singapore are showing a positive upward trend. The Group’s diversification into the purpose-built student accommodation (PBSA) segment is a positive development, though it could be challenging to scale up given the size of its balance sheet. Setting up a trust and raising funds would speed up the process if indeed PBSA is part of its long-term strategy (currently about 612 rooms in its portfolio). PBSA is an up-and-coming segment that the big players like Mapletree Investments Pte Ltd have entered into boldly (18,000 beds in UK, US, Canada). Even Wee Hur Holdings Limited, a small-cap contractor/developer is making inroads into the PBSA segment in a big way.   The upcoming FY2017 results may see revenue decline in excess of 20% and net profit plunge 80% year-on-year based on my estimate. This decline is due to the weaker performance of certain hotel assets in Perth and the absence of profit recognition from the sale of the joint venture property development project, RiverTree Residences.  Looking beyond the blip in earnings, the 1) continual improvement in margins from its hospitality operations and management services business, 2) profit recognition of its property development projects in Singapore (Woods Square), Australia (Harbourfront Balmain) and the UK (Greycoat Place London), 4) any improvement in asset efficiency metric, and 4) a potential expansion of their development landbank in Singapore, are potential catalysts for a re-rating. 

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