FAR EAST ORCHARD LIMITED

SBF Centre
Source: Far East Orchard Website


Company Profile



Far East Orchard is a diversified real estate owner and developer and manages a portfolio of hospitality assets. Its business segments can mainly be split into the Hospitality and Property segments.


Hospitality Management



Far East Orchard owns 10 and manages 90 hospitality assets worldwide, comprising of more than 13,600 rooms. Countries that Far East Orchard has a presence in include Singapore, Australia, Germany, Denmark and Malaysia.


Property Development


Develops properties mainly through joint ventures, previous developments include euHabitat and SBF Centre.


Property Investment


Far East Orchard generates rental income and capital appreciation from its portfolio of medical suites at Novena Medical and Specialist Centre, Singapore's premier medical hub, as well as student accommodation facilities in the UK and offices at Tanglin Shopping Centre.


Second Quarter Performance


Net profit fell 97.3% for the quarter, but the market's reaction was rather muted. For 1H 2017, net profit fell 87.7%. Last year's income was boosted by recognition of profits from SBF Centre, which is a joint venture development project. Revenue fell mainly due to the completion of lease agreements in Australia and New Zealand, and weaker performance from hospitality assets in Perth due to the challenging operating environment.


While earnings per share for 1H 2017 was 1.56 cents compared to 13.12 cents in 1H 2016, Far East Orchard's balance sheet still has development properties worth $23.6 million and properties held for sale valued at $124 million, which have yet to be recognised. The revenue from these properties will be recognised when the properties are transferred to the buyers. Hence, for FY 2017, including Far East Orchard's share of income from joint ventures, I expect
earnings per share to be comparable to previous years' of around 7 cents.

Financial Strength


As at 30 June 2017, Far East Orchard's balance sheet had $179.9 million in cash and cash equivalents, compared to total borrowings of $206 million. While this puts Far East Orchard in a slight net debt position, this is still a much better financial position compared to other developers. Far East Orchard's debt to equity ratio of 16.4% is also better compared to Capitaland's 58.3% and City Developments 46.9%. This means that Far East Orchard would be least affected by rising interest rates.


One Year Outlook


Hospitality Segment


Outlook for hospitality segment in Singapore to remain weak due to oversupply affecting revenue per available room. However, a potential turnaround may happen in 2018, as supply tapers off, according to this article published by SGX. Furthermore, Far East Hospitality Trust, which is managed by Far East Orchard, has gained 10% year to date, whereas Far East Orchard is still flat. There might be a potential upside as valuations remain low.


For Australia, increasing tourist arrivals is expected to drive demand. However, growth may differ among cities, with Sydney expected to be the strongest performer, while Melbourne, Perth and Brisbane may face oversupply issues.

Property Segment


Capitaland YTD share price
Source: Google Finance 
City Developments YTD share price
Source: Google Finance 



Earlier this year, Singapore listed property developers such as Capitaland, City Developments rallied in anticipation that certain property cooling measures may be removed. Far East Orchard's share price has remained relatively stagnant, as this is probably because it is not purely a property developer. In 2016, Far East Orchard's property development segment contributed no revenue. The local property market may be showing signs of recovery after a multi-year decline. Far East Orchard's joint ventures, Woods Square, RiverTrees residences and Harbourfront Balmain are on track and hitting sales targets. On the balance sheet, development properties and properties held for sale are 23.6 and 142 million respectively, and would contribute significantly to net profits when they are recognised.


In the UK, Far East Orchard is also developing student accommodation properties in Newcastle and Brighton. According to Knight Frank, this segment is expected to grow by 2.6% this year. Demand for student accommodation is more resilient to economic cycles, and we can expect a steady stream of recurring income. However, investors should note the possibility of foreign exchange risks, as the Pound may be further weakened should Brexit negotiations turn out to be unfavorable for the UK.


Valuation


Price to Book RatioDividend Yield %
Far East Orchard0.533.97
Capitaland0.902.68
City Developments1.160.70
Frasers Centerpoint0.824.43
Wing Tai0.531.42
Ho Bee0.542.50


Far East Orchard has been paying out consistent dividends of 6 cents annually for the past 4 years. At the current price of $1.51, this gives a dividend yield of 4%. With a net asset value of $2.89, Far East Orchard trades at a significant discount of a price to book ratio of 0.53, compared to 0.9 for Capitaland, 1.14 for City Developments and 0.82 for Frasers Centerpoint. While noting that the market has priced Far East Orchard below its net asset value for a number of years, from a dividend perspective, investors waiting for the net asset value of Far East Orchard to be unlocked would still receive 4% in dividends annually.


Liquidity Risk


As of 4th July 2017, Far East Organisation owned 60.64% of the shares of Far East Orchard. Shares of Far East Orchard are thinly traded, with bid-ask spreads of a few cents at times. Investors holding these shares may face liquidity risk and be forced to sell at a lower price should they require cash urgently.



Note: I am vested in Far East Orchard at a price of $1.52.


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