Monday, 9 October 2017

Portfolio Update - Far East Orchard

2017 is a great year for property developers. A number of property developers on the SGX such as CDL, UOL, Wing Tai and even recently, Guocoland had a significant run up since the start of the year.

Far East Orchard had been in my radar for sometime and it's a small pity that I missed entering at 1.4X range. However, after much analysis and earlier today, I've initiated a position in Far East Orchard of 800 shares at the price of $1.515


Far East Orchard is a property developer that has a real estate portfolio that can be split into 3 segments - hospitality and property and investment. With an outstanding shares at 422.6 million and price of 1.50, it has a market capitalization of 633.9 million.

Business structure of FEO
1. Property segment
FEO's property segment consists of property investment whereby they hold the properties and leases them out for rental income and property development projects.

Property Investment includes:

1. Medical suites: Units at Novena Medical Center & Novena Specialist Center
2. Student Accommodation: In Brighton and Newcastle upon Tyne
3. Offices: Tanglin Shopping Center
4. Shops: SBF Center @ Robinson Road (20%)

Property Development Projects includes:

1. Residences: euHabitat (20%), RiverTrees Residences (33%), Harbourfront Balmain in Sydney (50%), Floridian & past projects such as Regent Grove, Glendale Park, West Bay Condominium etc.
2. Offices: Wood Square (33%)
3. Industrail: Tannery House

The student accommodation in UK (Brighton and new buildings on Newcastle upon Tyne) is currently in the progress of development and is expected to complete in 3Q2017. The opening of this student accommodation facilities will brings in more revenue to FEO in their upcoming FY2018. 

It's also good to note that there's a good number of investment properties in FEO that are of freehold. The benefit of freehold properties building vs leasehold building are that the leasehold buildings will be subjected to a rate of depreciation over time. 


Harbourfront Balmain in Sydney has already been completed and is currently in the selling phase. In their upcoming financial reports, which the sales of HB will be reflected as their revenue in this next financial report. Currently, there is only 5 units remaining and 1 resale unit left.

Details of HB's sales can be found here.

The student accommodation in UK also has a free-hold tenure. The long-term fundamental of UK property market does look appetizing and will definitely be better after the Brexit.

2. Hospitality segment
FEO's segment includes management services, operations and property ownership. Their hospitality management arm - Far East Hospitality, operates over 90 properties with close to 14,000 rooms that spans across Australia, UK, Germany, Denmark, Singapore and Malaysia.

These properties includes Orchard Parade Hotel, Village, Quicy, Oasia and Rendezvous brands of hotel in Singapore & Australia and Adina Apartment Hotel in Copenhagen and Berlin. The concentration of hotels are slightly heavier in Australia and Singapore.

Hospitality is a cyclical industry and the current outlook for the hospitality sector in Singapore is weak due to the large supply of hotel rooms with a softer demand. On the Australia front, hospitality industry is positive, however different across the different cities in Australia.

3. Investment Holdings
FEO also has 33% of shareholdings in the REIT Manager and Trustee Manager of Far East Hospitality Trust (FEHT). 

Now, after knowing what their business is. It's time to take a look at the various metrics for FEO.
As the earnings for property developer varies from time to time depending on their development projects, to understand a property developer better, metrics such as P/E will not be able to accurately tell how much it's worth.

Net Asset Value
FEO's NAV at the end of 2Q2017 results stands at 2.89, and at the price at 1.515 today, this will mean that they're currently trading at a very big discount of 48% to their book value.

NAV of Far East Orchard as of 2Q2017

At this price, they're very undervalued and that it also provides a huge margin of safety for me at this entry price.

A comparison between it's peers with regards to their P/BV ratio is as follows:

Wing Tai's P/BV Ratio too represent a great discount at the current price with a 45% discount, which had a run-up recently and is close to trading at it's 52W high.


Debt-to-equity ratio
FEO at the end of 2Q2017, had a total gearing of 21.97%. As a property developer, they're quite reliant on loans and debt is most frequently used to finance their assets. As such this is also one metric to look out for. Comparing to it's peers like CDL, which has a gearing of 63.74% and a closer match, Wing Tai at 28.22% and UOL at 29.65%, FEO is relatively fine as compared to it's peers when there is an interest hike from fed.


Dividends
Ahhh. Now to the part about dividends. For the past 7 years since 2011, FEO has been regularly paying out 6 cents of dividend to it's shareholder. At this price of 1.515 I'm paying today, it translates to a dividend yield of 3.96%. I'm pretty comfortable with receiving 3.96% dividend from a property developer while waiting for it's value to unlock.

Currently at the end of 2Q2017, their EPS stands at 1.56 cents for the FY2017.

  
Who is behind FEO?
Far East Organization Pte Ltd have a 60.99% direct interest in FEO and it is founded by the late Mr Ng Teng Fong, the richest man in Singapore. Currently, it is being overseen by the son of Mr Ng Teng Fong, Phillip Ng. Together with the sister company of Far East, Sino Group - the largest property developer in Hong Kong. Far East Organization is also the largest landlord and property developer in Singapore.

However, with a high interest from Far East Organization, it may both mean a good/bad thing. The performance of FEO will be hitting the Ng Family directly, should the stock not perform. At the same time, the interest from Far East Organization which exceeds 50%, they will also be able to conduct a buy-out easily when they feel that their stocks are too cheap.

With the public float of 133.87M share, it will be not be difficult for the parent organization to fork out S$267.74M, at a privatization price of $2/share which will translates to 30% on their NAV when they feel that the share price is too cheap.


It's also good to note that with the run up from the fellow property developer peers, hopefully that this laggard will be able to follow up and not forgetting that the hospitality sector about to turn around. With fingers crossed, let's hope that FEO will be able to turn around with the possible catalyst in the future.

The initiation of FEO is more of an asset play, whereby the combined asset value is much higher than it's market capitalization, and backed by assets. While waiting for it's value to unlock, I'm happy to be paid close to 4% dividends :)

2Q17 FEO's financial statement can be found here.
DBS research on Hospitality Sector can be found here.

11 comments:

  1. Nice article. Nowadays, almost all property stocks green green. Why not other asset play? You mention Wing Tai ran up recently, what about OUE and Hong Fok? lol.

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  2. Hi KPO,

    Nice to see you here again!! :)

    Both OUE and FEO is in my radar for sometime, however since the start of this year, OUE too had run up from 1.76 and closing today at 2.00 (24cents/13.35% increment). OUE too represent a huge discount with a P/BV ratio at 0.46. However, I never had the chance to cashed in as it does not hit my target entry price.

    Hong Fok on the other hand, is currently trading near their 52 week high and similarly, had a 19cents or 29% run up since Jan. Nonetheless, even at today's closing price, Hong Fok is still representing a huge margin of safety at 62%!

    Despite the 2 insider purchase this year, I'm feeling rather uncomfortable to know that Hong Fok is paying the executives (a family business) a very big pay check. Along with the little dividends they're paying their shareholder.

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  3. In Q2 2017, FEO's profit plunges 97.3%. Even if we discount the absence of one-time gain, this is still a huge drop. Do you think this is a sign of concern?

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    1. Hi See,

      Thank you for dropping by!! :)

      Earnings from property developer are usually lumpy. The profits for their development will only be recognized after the sale of the asset. As such, the absence of one time gain from SBF Center indeed look bad on their Q2 results. In the coming quarter, when the sales of HB is recognized, I believe it will be giving FEO another push.

      Along with the poorer performance from the hospitality sector, this also resulted in the decline in their profit. However, as the hospitality sector is bottoming out, we should be seeing a better result posted from FEO in the next few quarters.

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  4. Hi Sleepydevil

    Just nice I initiated a position too yesterday at the same time with you at $1.515 for 20,000 shares.

    I think the comparison with CDL and Wingtai alike are not very comparable. Hotel developers tends to have a lower roa and lower cap rate and its much harder to find a buyer for them to sell the assets.

    Moreover FEO recurring income is only $20m per year, so its a long shot for them to become a sustainable dividend payer, even though these few years they have proven to be able to pay out 6 cents as timing of their development comes nicely.

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    Replies
    1. Hi B,

      Nice to see you here again and wow.. so you're the 20k there behind my tiny little 800 shares. HAHA! With you on board, this gives me more confidence :p

      Yes, it is indeed harder for their assets (hotels) to be sold to another party and their ROA is rather dependent on the sector performance.

      For CDL, I'm looking at their bite with Millennium & Copthorne Hotels while Wing Tai on the other hand I do remember that they have a couple of serviced apartments under the brand of Lanson Place. Do correct me if I'm wrong.

      It would be better for FEO, if they were to have more properties that will be able to provide them with recurring income (Eg. TPC for Guocoland) to better cushion them when the developments gain are not recognized.

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  6. Hi, glad to see someone else vested in FEO too! :)

    I've also wrote a post on FEO back in August. You can take a look if you wish to! https://alpacainvestments.blogspot.sg/2017/08/far-east-orchard-limited.html

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    Replies
    1. Hi AlpacaInvestments,

      Thank you for dropping by and welcome to my blog :)

      Nice to see another fellow investor in FEO!! I've just dropped by your blog! Nice analysis there for FEO! I've entered about a month over after your entry. Let's ride on together on FEO's journey to unlocking it's value :p

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  7. Thanks for your research n sharing,
    With the positive news of HF Balmain n The RiverTrees Residence fully sold n also the upcoming rental income of the student hostel may be tempting but most of its revenue comes from the hospitality sector.
    N hospitality is still facing headwinds until now n hence the drag in its share price.
    I think buying into this counter carries a higher risk.
    FEHT though has run up recently but actually its business n DPU are not improving too.
    . Just my opinions.
    I'm new to investing too.
    Let's see its 3Q results how it'll pan out.
    Btw, all the best to all the bravehearts who are in.

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    Replies
    1. Hi Shayna,

      Thanks for visiting my blog! Hospitality is a cyclical industry and I believe that with the headwinds that are dragging their share price, the bottoming out of this sector along with its development will come as a double booster for FEO.

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