Brokers' take: CGS-CIMB reiterates 'add' on FEHT; expects accelerated recovery from FY2023

CGS-CIMB reiterates "add" on Far East Hospitality Trust (FEHT) with a higher dividend discount model-based target price of 74.5 Singapore cents from its previous target price of 63.9 cents after factoring in an accelerated recovery from FY2023.

The new target price implies 0.95 times of the trust's price-to-book value, said CGS-CIMB analysts in a Tuesday report.

This comes after the hotel and serviced residence hospitality trust announced that it received an outline advice from the Urban Redevelopment Authority (URA) in relation to the redevelopment of Central Square (Village Residence Clarke Quay).

The outline advice was issued under an incentive scheme, and involves a potential rezoning and uplift in gross floor area, subject to approvals from URA and other authorities.

The analysts said that in the event that FEHT decides to divest the asset to pare down gearing by the end of 2021, the distribution per unit (DPU) for FY2022-2023 will be reduced by an estimated 2 per cent.

Further, gearing will fall to about 34 per cent from 38.5 per cent, making FEHT one of the most lowly-geared real estate investment trusts (Reits) in the country, they added.

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Given that the tourism industry is an important pillar of the sector, the analysts find that the "recovery of FEHT hinges on the pace of Singapore reopening its borders", but at the same time believe that the government is "wary of the risks".

While the analysts do not expect the Reit to hit its hotel variable income until 2022, the Reit "should continue to be supported by its master lease income which underpins the stability of its DPU". The master lease will not expire until 2032, according to the research house.

"We expect FEHT's hotel segment to be supported by its master lease income in FY2021/22 forward, and achieve variable income in FY2023 as we assume accelerated recovery of international travel from end 2022," the analysts said in the report.

They also expected the serviced residence segment to continue receiving variable income, supported by demand from long-term guests, and added that its retail segment should deliver stronger income ahead due to minimal rental rebates and improvements in the operating environment.

Upside and downside risks highlighted by the analysts included a stronger or a slower recovery from the Covid-19 pandemic.

Units of FEHT closed at S$0.60 on Wednesday, down by S$0.02 or 3.23 per cent.