Far East Orchard Ltd

Maybank Kim Eng on 19 June 2013

AFTER repeated bidding attempts, Far East Orchard has finally won the HDB government land sale (GLS) tender at Fernvale Close (99-year leasehold), jointly with Frasers Centrepoint (FCL) and Sekisui House for S$256.98 million (or S$533 per sq ft).

The land parcel sits on a site with an area of 161,000 sq ft and has a gross floor area of 482,000 sq ft, with estimated capacity of 495 dwelling units.

Far East Orchard's capital contribution is 30 per cent while that of FCL and Seikisui will be 40 per cent and 30 per cent, respectively.

We estimate breakeven cost at $860 psf and average selling price of $1,000 psf. This is comparable to the nearby H2O Residences (total 521 units) by CDL, which has an ASP of about $939 psf.

The new development adds 4 cents to our RNAV. According to the Urban Redevelopment Authority, H2O Residences is about 94 per cent sold as at May 2013.

We are expecting Fernvale Close to be launched in 2014 and completed by 2017.

Year-to-date, Far East Orchard's share price has lagged the STI index by about 8 per cent because of the overhang of the Australian acquisitions.

Far East Orchard announced in April that it is looking at acquiring five Australian Hospitality assets and the hospitality management business of Toga Group (50 per cent stake) for $285 million and three Australian Hotels and existing hospitality management business of Straits Trading Company (STC) under a 70-30 JV (issue price of $236.2 million for 70 per cent stake).

Clients we spoke to remain concerned about the viability of the Australian hospitality business, and the weakening prospects for Australian commodities following China's slowing economic growth.

The Singapore government 10-year bond yield has risen sharply by more than 70 basis points to 2.10 per cent in a month's time, partly driven by Federal Reserve chairman Ben Bernanke's congressional testimony on May 21.

The S-Reits market has so far corrected by about 11 per cent since then, and we expect the resulting rate hikes to cause physical cap rates to expand moving forward.

We thus ascribe a larger 35 per cent discount (previously 25 per cent) to our residential RNAV, given that Far East Orchard's developments are primarily onshore and it is a mid-cap developer.

Maintain "Buy" with a reduced TP of $2.28 (previously $2.50).

BUY

Far East Orchard

Kim Eng on 15 Mar 2013


SBF Centre – Next price catalyst. FEOR has recently sold 113 out of 138 office units released (total 192 units) at SBF centre (20% stake) with prices starting from SGD3,200 psf. Given the strong sales momentum in strata commercial space lately (Alexander Central, Paya Lebar Square, PS100 etc.), this is within expectation. 65% of the office buyers are companies, entrepreneurs and professionals offering services spanning trading, legal services, consulting and secretarial services, and financial advisory. The Singapore Business Federation (SBF) will be a major occupier in the development, though the amount of space it will take, and whether it will lease or purchase the space, is yet to be announced. The whole-floor office units have also not been released, but pricing (psf basis) is expected to be higher given the superior views they offer.

Mediplex@SBF. On the medical suite front, 27 of the 48 suites have been sold. Prices for medical suites, which are located at levels 3 to 5, start from SGD3,800 psf. This represents a favorable price, although the SBF Centre is not within walking distance to any medical hospital. Previous 2012 transactions at Parkway Novena (Mount E Novena), Novena Medical Centre and Novena Specialist Centre were contracted at SGD3,700-SGD4,201 psf. FEOR believes that medical services have yet to make inroads into this high-density urban centre. Far East Organization (FEO) and FEOR won the site in Sep 2012 with a bid of
SGD311m (SGD882 psf ppr) F&B outlets interest. There is also intense interest from potential buyers in the F&B outlets and alfresco dining areas on the ground floor. We think prices could fetch north of SGD5,000 psf. Nonetheless, the developer is considering holding these back and offering them for lease so that it can control the choice of F&B tenants and draw traffic to the area.

Investment thesis intact. We continue to like FEOR for the following reasons: (1) Possible synergies with its parent - Far East Organisation (FEO), who is Singapore's largest private developer (built 1-in-6 private homes in SG) with purportedly the largest onshore asset and land bank (~80m sqft) [Note: FEO sold the most number of dwelling units in 2012] (2) Clear focus post-restructuring, with emphasis on residential development (24% GAV), healthcare (21% GAV) and hospitality management (22% GAV). (3) FEO will inject future healthcare assets into FEOR, which we expect to benefit from rising medical tourism. (4) Undervalued in our view, with net cash already at SGD1.11. Reiterate BUY with an attractive SOTP valuation of SGD2.50.

Far East Orchard

Kim Eng on 3 Dec 2012

Overseas expansion. FEOR recently inked a non-binding MOU with Straits Trading Company (STC) to consider acquiring: (1) STC’s entire hospitality management business (including trademark rights to the "Rendezvous" and "Marque" brands); (2) 50% interest in three Australian hotels, namely Rendezvous Studio Hotel Perth Central, Rendezvous Grand Hotel Melbourne and Rendezvous Hotel Perth; (3) 50% interest in STC’s stake in Coastal Coffee Pty Ltd (café business); and (4) in return, STC will have the right to subscribe up to 20% of the share capital of the enlarged hospitality management company of FEOR. 

Well-positioned for acquisitions. Depending on the final purchase consideration with STC (we estimate a deal size of SGD300-600m), we view FEOR's expansionary gambit positively. If the proposed transactions are to proceed (definitive agreement signings expected only after 31 Dec 2012), FEOR's expanded portfolio will consist of more than 30 hotels and service residences under five distinct brands (Village, Oasia, Quincy, Rendezvous, and Marque) and more than 6,000 rooms, with a regional footprint across Australia, New Zealand, China, Malaysia, and Singapore. FEOR has a strong cash position of SGD485.1m and a relatively low debt of SGD70.1m (D/E = 6.4%) as of 30 Sep 2012. Its strong balance sheet should place it in a good position to make acquisitions. 

REIT fees to increase. Separately, Far East Hospitality Trust (FEHT) is also exploring the proposed acquisition of a leasehold interest in Rendezvous Grand Hotel Singapore and its retail component, Rendezvous Gallery Singapore from STC, which are valued at SGD284.65m as of 31 Dec 2011. Upon completion, FEHT will grant a Master Lease of the hotel component to the Far East Organisation, FEO (the Sponsor), as master lessee under a master lease agreement. We expect FEO to appoint FEOR as the hotel operator under the same terms as previous hospitality management agreements – basic fee of 2% GOR and incentive fee of 5% GOP. In addition, with a 33% stake in the REIT manager, FEOR will also benefit from the 1% acquisition fee and enlarged management fees. 

In the grand scheme of things. We believe that the STC deal is just the beginning of FEOR’s overall expansionary plan. Within Singapore, we think that Park Avenue (hospitality arm of United Engineers), the Park Hotel Group (under the Law family), Stamford Land, the Meritus Hotel and Resorts (under OUE), Frasers Hospitality (under F&N), and others are possible acquisition/collaborative targets in the future. We continue to like FEOR for the following reasons: (1) Possible synergies with its parent, Singapore's largest private developer (built 1-in-6 private homes in SG); (2) Clear focus post-restructuring, with emphases on residential development, healthcare, and hospitality management; and (3) FEO will inject future healthcare assets into FEOR, which we expect to benefit from rising medical tourism. Reiterate BUY with TP unchanged at SGD2.31.

Far East Orchard

Kim Eng on 12 Nov 2012

Post-restructuring aftermath. With the completion of the restructuring exercise on 27 Aug 2012 (REIT Transaction and Asset Swap Transaction), FEOR got a cash boost of SGD308m vis-à-vis last quarter, largely from the net receipt of its divestment of its 3 hospitality assets. 3Q12 net profit also shot up to SGD126m (+680%QoQ, +293% YoY), mainly driven by the disposal gain of its 35% Yeo Hiap Seng (YHS) stake to its parent, Far East Organization (FEO). The newly acquired NMC/NSC units and hospitality management business also made their maiden contribution of SGD0.4m and SGD1.5m respectively, spanning a period from 27 Aug till 30 Sep 2012. We estimate average gross rentals for the medical units to be ~SGD10.50 psf/mth.

The need to replenish land-bank. Contribution form FEOR's property development business will ease as it had recognised the final profit from the Floridian project (TOP on 5 Mar 2012) in 3Q12 (remaining 6% of project). We revised our completion estimates as we had previously assumed that the bulk of Floridan's proceeds will flow through in FY12. Almost 92% of the total units in euHabitat have also been sold. The Bassein Road JV is in the early stage of development and no recognition of revenue is expected in FY12. (See Figure 2). Armed with fresh dry powder post-restructuring, we think FEOR is in a in a good position to capitalize on growth opportunities ahead. We expect to see more involvement from FEOR and its partners in GLS biddings moving forward.

Dividend. FEOR will be paying out 0.22086 YHS dividend in specie for every FEOR share on or about 3 Dec 2012. The 12 SG-cts special dividend will be distributed on 8 Jan 2013. Book closure date for both is on 23 Nov 2012.

Investment thesis intact. We continue to like FEOR for the following reasons: (1) Possible synergies with its parent, who is Singapore's largest private developer (built 1-in-6 private homes in SG) with purportedly the largest onshore asset and land bank (~80m sqft). (2) Clear focus post-restructuring, with emphasis on residential development (26% GAV), healthcare (23% GAV) and hospitality management (24% GAV). (3) FEO will inject future healthcare assets into FEOR, which we expect to benefit from rising medical tourism. (4) Undervalued in our view, with net cash already at SGD1.05/shr and 0.22086 YHS shares fetching another SGD0.66/shr (priced at a conservative SGD3.00). Reiterate BUY with an attractive SOTP valuation of SGD3.09.

Far East Orchard

Kim Eng on 17 Sept 2012

Pacific Plaza – Possible acquisition target. Far East Organization is refurbishing part of Pacific Plaza as  Scotts Medical Centre (SMC) with 36k sqft covering seven floors. This AEI is slated for completion in 1Q13. It will offer 44 medical suites, ranging in sizes from 545-1493 sqft, while the existing retail component on the lower floors are expected to remain intact. We understand that existing tenants such as berries (Chinese enrichment)  are in the midst of vacating the premises. We think that rentals for SMC could fetch around SGD15-18 psf. At valuation of SGD3,900 psf, purchase consideration works out to about SGD140m. With a cash stash (FY12) of over SGD300m post-restructuring, we think FEOR is well- positioned to undertake this acquisition next year and further expand its healthcare exposure.

Restructuring enhances the recurring income stream of FEOR. The acquisition of (1) 45 units of medical suites in Novena Medical Center and 48 units of medical suites in Novena Specialist Center (2) the hospitality management business, and (3) a 33% interest in the REIT manager and Trustee-Manager of FEHT was completed on 27 Aug 2012. This will enhance the recurring income stream of FEOR (at least SGD20m per annum), not to mention the returns from existing property development and investment business. The restructuring also allows FEOR to expand its business to cover all aspects of the hospitality industry.

Healthcare and Residential to lead. According to our estimates, the healthcare real estate and residential development segments will constitute the major bulk of FEOR’s value post restructuring (35% and 33% FY12 GAV respectively). The hospitality management business and REIT/trustee-manager fee income are relatively small (18%). We also noted that FEOR residential land bank appears thin, with Floridian (60% stake) already achieving TOP in Mar 2012 and eu-Habitat (only 20% stake) and the Bassein Road project (only 30% stake) targeted to complete by end 2016. This will cause development revenue to taper down beyond FY12.

Upgrade to Buy from Hold. We worked out the SOTP valuation for FEOR post-restructuring and derived an attractive SOTP per share of SGD3.05. In addition, we expect the 12 S-cts special dividend and YHS dividend in specie (0.229 YHS per share@SGD1.80) to be distributed near the Nov-Dec 2012 period. Based on a 25% discount to SOTP, our TP stands at a conservative SGD2.82 (See Figure 6). Upgrade to Buy from Hold. With its strong cash position (FY12 cash per share of SGD1.00), we expect FEOR to bid for more land banks or acquire more yield-accretive properties moving forward.