DBS started Far East Orchard at Buy, with a S$1.70 target price, citing “deep value and compelling reasons to trade higher.”
Shares of FEO are trading at 0.41 times its 12-month forward price-to-book ratio, a discount of around 51 percent to its SGX-listed hospitality pure-play peers, DBS said. The bank noted FEO isn’t a pure-play on hospitality, but added that its asset portfolio is comparable in quality to its larger peers.
“We believe that investors have not accorded FEO the right valuation despite the pivot away from its reliance on property development income (where earnings are lumpy by nature) and focusing on growing its recurring income portfolio, which currently includes its hospitality business, medical suites, and purpose-built student accommodation (PBSA) assets,” DBS said.
FEO’s five-year plan includes growing the hospitality and PBSA portfolios to 25,000 rooms and 5,000 beds, respectively, by 2025, representing a compound annual growth rate of 8.4 percent and 7.0 percent, the note said.
PBSA has shown resilience in economic downturns and is likely to become FEO’s main growth driver in the next few years, while the gradual return of leisure travel to Singapore appears imminent with the city-state’s high vaccination rate, DBS said.
DBS forecast the group would return to a “REIT-like” payout of 6 Singapore cents a share in fiscal 2022, translating to a yield of around 5.5 percent.
Shares of Far East Orchard ended Wednesday unchanged at S$1.14.