A reader wrote to me asking for my thoughts regarding some questions about Far East Orchard (FEO). I am vested in FEO at a price of $1.52, a position I initiated back in August 2017. Since then, its share price has been largely flat, trading between a range of $1.46 to $1.59. 

Third Quarter Results

FEO's 3rd quarter results were largely disappointing, with revenue down 20.7% and net profit falling by 74.2% year on year. The decline in revenue was due to the completion of some lease agreements in Australia and New Zealand, and weaker performance of assets in Perth.

As for FEO's falling profits, if we were to eliminate the effect of the contributions from joint ventures, the decline would be less drastic. For Q3, share of profits from joint ventures was $7.4 million, compared to $1.6 million this year. These profits were mainly from FEO's progressive recognition of profits from their RiverTrees Residences JV. If the profits from joint ventures were disregarded, FEO's underlying profit before tax would have declined from $5.4 million to $3.0 million instead.

Looking at 9M 2017 figures, FEO's net profit thus far stands at $10.2 million, which give us an earnings per share of 2.3 cents, far lower than $63.4 million for 9M 2016. Again, this was because 9M 2016 included much higher profits for JVs of $64.9 million.

Future Outlook

A upcoming positive for investors is that Harbourfront Balmain, a 121-unit joint venture development with Toga Group, is expected to be completed by Q4 2017. The project is a 50-50 joint venture, and it would be ideal for profits from this JV to be recognised in the 4Q 2017. This one off contribution to earnings should be able to allow FEO to sustain their dividend payout of 6 cents annually, which translate into a yield of 4% based on current prices. 

FEO also has developments in the pipeline, including Woods Square, residential and commercial development in Woodlands, and another, mixed development in London. These should provide us with some earnings visibility for the next two years.

Medical Suites

Novena Medical Centre, Source: FEO website

One of the points brought up by the reader was that whether FEO's classification of its 37 medical suites units at Novena as 'properties held for sale' for many years indicated that there were some tenancy issues, because of the lack of interested buyers.

For this issue, I've looked back at their 2012 Annual Report, when FEO first acquired the medical suites via an asset swap. As stated in their 2012 Annual Report, FEO's intention was to put some up for sale, and keep the rest for capital appreciation. Since then, these medical suites have been classified as properties held for sale. In the 2012 AR, they did not state the number of units held for sale, but provided the gross floor area, which was 593 sqm and 2741 sqm for the medical centre and specialist centre respectively. Today, this figure is 515 and 2249 sqm, so I believe a few units have been sold. 

Page 111 of FEO's 2016 Annual Report states that:

Rental income from the leasing of medical suites held for sale, if any, is included under the investment segment on the reports

As for whether there are any tenancy issues, I wasn't able to find any information regarding the occupancy rates of the medical suites, because FEO does not report this separately. The rental income from these medical suites are classified together with the rental income form their investment properties. On the accounting aspect, accounting rules allow for the properties held for sale to be excluded from depreciation. This means that these properties would not incur any depreciation expenses. A quick calculation shows that they are valued at around $4,200 psf. In their 2016 AR, they stated that comparable sales prices of the medical suites were $3,210 - $7,350. Perhaps FEO's asking price is too high, but these could still be rented out. Currently, the total value of FEO's properties held for sale is $124 million, and this value is carried based on the lower of cost and net realisable value.

That said, I believe that there are some potential developments that investors of FEO should keep a lookout for.

Tanglin Shopping Centre Collective Sale 

An ongoing process would be the 3rd collective sale attempt by Tanglin Shopping Centre. This would be their third attempt at a collective sale, after two failed attempts in 2011 and 2014. The first sale failed because the reserve price of $1.25 billion was not met, while the second attempted sale at a reserve price of $1 billion failed to meet the 80% consent requirements from the owners. 

Based on FEO's 2016 Annual Report, FEO owns 4 freehold office units in Tanglin Shopping Centre, valued at $11.2 million. Although the floor area of these units were not stated, they were valued based on comparable sales prices of $1705 to $2764 psf. If the collective sale is successful, FEO is likely to receive a premium over the latest valuation. As the ageing development is already 47 years old, the sale would probably be able to unlock some value for shareholders.

Student Accomodation

Going forward, FEO's completion of their student accommodation developments in Newcastle in August 2017 would bring additional recurring income. Their Portland Green Student Village already has 612 existing beds, and this completion would add more beds to it. FEO is also developing another student accommodation facility in Brighton, which would add another 193 beds.

Turner Court. Source: FEO website

What I like about the student accommodation sector because it is less dependent on economic cycles. I believe that FEO's weakness is the lack of consistent recurring earnings, especially after the completion of some operating leases in Perth. In the next few years, I hope to see them increase the percentage of recurring earnings' contribution to total profits.


While FEO's earnings have fallen this year, I still continue to hold on to my investment as I believe that the deep discount to its net asset value means that the downside risk is somewhat mitigated. As FEO's return on assets are lower relative to its peers, my target price is derived from a lower price to book ratio of 0.70x. That gives us a price of $2.02, based on FEO's latest net asset value of $2.88. This represents a 35% upside from its closing price of $1.50 on Friday. Meanwhile, I'll continue to collect the dividends and watch for any potential development.

Related post: Investing in Far East Orchard Ltd

Note: As of writing, I am vested in Far East Orchard at $1.52

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