Brokers’ take: Analysts mixed on FEHT’s target price direction despite potentially higher DPS
Michelle Zhu
MAYBANK Securities and UOB Kay Hian (UOBKH) have raised their distribution per stapled security (DPS) estimates for Far East Hospitality Trust (FEHT) after the stapled group reported a set of positive third-quarter financial results.
While this has resulted in UOBKH’s price target rising to S$0.76 from S$0.71, Maybank lowered its target on the stapled group to S$0.75 from S$0.80.
On Thursday (Oct 26), Maybank analyst Krishna Guha said the price target reduction comes after introducing a higher discount rate to its three-stage dividend model used to value FEHT, which the research house continues to rate at “buy”.
The new price target imputes a risk-free rate of 3.3 per cent and cost of equity ratio of 7.2 per cent, which are both above the previous 2.8 per cent and 6.6 per cent, respectively.
Maybank nonetheless raised its FY2023 DPS estimates by 6 per cent to S$0.04, which translates to a DPS yield of about 7 per cent. Both FEHT’s DPS and yield are expected to remain at this level in FY2024 and FY2025.
“The (hospitality) sector continues to recover, albeit at a slower pace, and FEHT offers a stable distribution profile and a lowly geared balance sheet,” noted Guha.
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“Management indicated a slower growth outlook for room rates, and RevPAR (revenue per available room) growth will depend on occupancy levels. Year-end valuations are likely to remain sticky. FEHT will look to acquire overseas assets, such as in Japan, which offer a healthy spread to local funding cost.”
UOBKH also raised its DPU forecasts for FY2023 to 9 per cent, and another 8 per cent for FY2024 to factor in the strong Q3 results, with expectations of S$0.5 million and S$3 million in capital distributions for FY2023 and FY2024, respectively.
The research house projects a DPS of S$0.041 for FY2023, representing a DPS yield of 7.2 per cent.
As a result, UOBKH’s price target was bumped up to S$0.76, which is based on a dividend discount model that assumes 2.8 per cent terminal growth and a cost of equity of 7.75 per cent.
Highlighting that the counter trades a price-to-book ratio of around 0.6 times to represent the lowest in UOBKH’s universe of hospitality Reits, analyst Jonathan Koh said the “steep discount” that FEHT is trading at against its net asset value is “unwarranted”.
This is in view of the stapled group’s good corporate governance, strong sponsor and low aggregate leverage as at end-September, he added.
In a separate report, CGS-CIMB reiterated its “add” rating for FEHT, while leaving its estimates and S$0.77 price target unchanged.
Its analysts highlighted that while FEHT’s Q3 cost of debt and gearing remained “stable”, the stapled group’s percentage of loans on fixed rates were “comparatively low” among its S-Reit peers.
The research house has forecast a DPS of S$0.038 for FY2023, which puts the resultant dividend yield at a lower 6.7 per cent compared with Maybank’s projections.
In the longer term, it expects the stapled group to report a DPS of S$0.043 for FY2024 and S$0.044 for FY2025.
Stapled securities of FEHT were trading S$0.01 or 1.8 per cent higher at S$0.58 as at 10.53 am on Thursday.
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