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.

Source: Maybank Kim Eng Research - 03 Dec 2012