FE-HTrust – CIMB

Pure Singapore hotel play

With a portfolio diversified across Singapore and about 25% of it (by asset value) made up of serviced residences, FEHT is well-positioned to tap the visitor market in Singapore, in our view. In addition, fixed and commercial rents offer an estimated 60% (based on FY13 earnings) of gross income protection, which makes FEHT one of the more defensive hospitality REITs in Singapore.

We initiate coverage with a Hold rating and DDM-based (discount rate 9.0%) target price of S$0.82. Although earnings are expected to be resilient, we believe FEHT is fairly valued given the lack of strong near-term drivers, a lower NPI yield than peers and a higher valuation for its portfolio. Re-rating, however, could come from any positive surprises in tourist arrivals or corporate spending.

Diversified hotel player

FEHT‟s investment mandate is to invest locally, where the hospitality outlook is stable. As such, risks from foreign exchange and tax leakage from overseas expansion are minimised. Although only five of its 12 assets are located in the prime districts of Singapore, others are located nearer tourist districts and hospitals, enabling FEHT to tap the various visitor market segments of Singapore. At end-Dec 13, hotels (including commercial space/rentals) in its portfolio made up 75.4% of its asset value and 85.2% of FY13 gross revenue, with the rest coming from serviced residences.

In line with peers

FEHT is trading at 7.4-7.5% FY14-15 dividend yields, in line with its peers. At 0.8x FY14 P/BV vs. 1.0x for its closest peer, CDLHT, we believe its current price captures the differential in their book valuations (estimated value per room key of S$854k for FEHT vs. S$586k for CDLHT‟s local assets). In addition, NPI yield (estimated at 5.5%) for its hotels is also slightly lower than the c.6% for the other hotel REITs.

Initiate with Hold

FY14 RevPAR is expected to be flat as potential upside from sturdier corporate spending is likely to be offset by strong competition, a result of high supply of hotel rooms. Our target price of S$0.82 implies a dividend yield of 7.0% and potential stock upside of 5.6%.