Broker's take: DBS downgrades Far East H-Trust to 'hold' amid virus spread

DBS Group Research has downgraded its rating on Far East Hospitality Trust (Far East H-Trust) to "hold", and lowered its 12-month price target on the counter to S$0.69 from S$0.80 previously.

This comes amid "cautious sentiment shrouding hoteliers in Singapore" as a result of the coronavirus outbreak, DBS analyst Derek Tan wrote in a research note on Monday.

The revised price target represents a 1 per cent upside from Far East H-Trust's Jan 31 close of S$0.68. 

As at 10.10am on Monday, Far East H-Trust units were trading at S$0.66, down S$0.02, or 2.9 per cent. 

"In view of Far East H-Trust's exposure to the Singapore market only and about 70 per cent exposure to hotels by gross revenue, we believe its operations would be adversely impacted," DBS said. 

It added that the recent travel ban on inbound travellers from China will have a negative impact on pure play hotel real estate investment trusts like Far East H-Trust. 

"Our forecast is below consensus, as we have only projected 3 per cent recovery in revenue per available room (RevPAR) in 2020-2021, but we see downside risk in the near term as travellers stay away," DBS wrote. 

That said, it noted that about 58 per cent of Far East H-Trust's income is from the hotel and serviced residence components, which are fixed within a master lease structure.

The remaining 19 per cent is derived from commercial premises with longer lease tenures, while about 23 per cent comes from variable rents from hotels and service residences.

While the master lease structure incorporates elements of stability, variable rents from hotels and service residences may be shaved off, which will hit forecast distribution per unit for fiscal 2020, the broker explained. 

Overall, DBS is of the view that although the medium-term outlook for the trust remains bright, soft corporate demand on the back of the current macro uncertainties and stiff price competition will likely cap Far East H-Trust's RevPAR performance in the near term.