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.