Saturday 20 April 2019

Far East Orchard Holdings

Far East Orchard is a relatively unknown company on the SGX. However, what I noticed is that it has been constantly declaring a dividend of 6 cents annually. At a current price of $1.27 per share, this translates to a yield of 4.65%.
Far East Annual Declared Dividends

Is the 6 cents dividend sustainable?

This is the first question I had in mind. While delving into Far East's cash flow, I did not use the reported figure under " net cash from operating activities" but instead "Cash before working capital changes"; this eliminates the chance of companies using trade receivables or trade payables to juice up their operating cashflow. Below is what I found for Far East Orchard:

FY14: $50.9 Million
FY15: $36.2 Million
FY16: $24.7 Million
FY17: $27.2 Million
FY18: $28.9 Million

(Edits with Ghchua Contributions on Investing Cash inflow)

Ghchua has pointed out that Far East Orchard has been receiving cash inflow as dividends from its joint ventures of overseas assts. A quick look into their investing activities shows the varying level of dividends received.

Cash inflow from Dividends of JV, found in investing cashflow:

FY14: $2.8  Million
FY15: $17.4 Million
FY16: $27.5 Million
FY17: $14,1 Million
FY18: $36.7 Million

To sustain Far East's Dividends, the company needs to generate about $26 million. Netting off interest expense (of about $5.5-6.0 Million) and income tax expense, it seems Far East Orchard has a sufficient buffer of cashflow to sustain its 6 cents dividends

Business of Far East Orchard

While Far East Orchard's business is no doubt in properties, this segment can be broken down into 2 further parts - Property Management and property developer.

One positive aspect of Far East is its property management as a REIT manager. Far East is the manager for a business trust listed on the SGX. As a reit manager, a majority of its management fees comes from the asset value of the REIT; this means a rather stable of income for Far East, preventing any downward revision in its future cashflows.

The company too has recently purchased student accommodation projects which should ensure stable cashflow.

However in the sense of cashflow, Far East's property development arm is one which generates inconsistent cashflow- one year can be extremely high, while the next can be low. Looking at its latest annual report, Far East's property Development revenue for the past 2 years has been below 20%. It seems the company is largely dependent on its hospitality assets and business trust for income

Hospitality Arm

Far East has a few hotels in Singapore, Australia, Germany, Denmark and Malaysia. The hotel chain names of "Rendezvous, Oasis and Village Hotel" are one of the largest few brands in the chain.

On the other hand, it runs a business trust called Far East Hospitality Trust, which manages only its Singapore Hospitality property. Far East Orchard is drawing a fixed amount of $12.2 million annually for running the Trust.

This means the rest of Far East Orchard's assets such as overseas hotels and student accommodation projects are contributing to the remainder of the $16 million plus cashflow. Most of these assets are freehold by nature which is definitely better than a leasehold property. From the cashflow, received in its investing activities, it seems Far East Orchard has been receiving about $16 million in cashflow, which will sustains its 6 cents dividends.

In addition, In my view, Far East Orchard has another attraction and that is its ability to sell off its freehold overseas assets into its business trust (who will always be a "willing buyer").

Conclusion

From the above, Far East's 6 cents dividend is sustainable. In addition, with Far East owning numerous freehold assets in Singapore and the rest of the world, it seems a definite that Far East Orchard will be at least able to generate $12.2 million of cashflow even during the worst times.

At its current price of $1.27 with an estimated dividend yield of 4% similar to CPF Long term interest, the company is slightly undervalued. With Far East Orchard additional ability to monetise its overseas assets by injecting it into its Far East Hospitality trust. There seems to be some value to Far East Orchard