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.