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