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
Far East Orchard has a constant interest expense of $5.5-6.0 Million. So netting it off, it leaves about $22 Million. To sustain Far East’s Dividends, the company needs to generate about $26 million. This means the current dividends are slightly higher than the cash flow it generates.
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
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. In my view, the only plus point of owning Far East is its ability to sell off its freehold overseas assets into its business trust (who will always be a “willing buyer”). This is the only possible investment thesis into Far East Orchard, given its current dividends is already a bit stretch too high.
From the above, Far East’s 6 cents dividend is a bit too high for its cashflow; a more sustainable rate is a 5 cents dividend. In addition, with Far East owning numerous freehold assets in Singapore and the rest of the world, it seems a definite that Far East will be at least able to generate $12.2 million of cashflow even during the worst times.
A 5 cents annual dividend will be good gauge for Far East Orchard. At its current price of $1.27, the company does seem fairly valued. The only way for it to unlock more value for shareholders is to sell its overseas freehold properties into its Far East Hospitality trust.