Sunday, July 14, 2013

Will Far East Orchard’s Foray Down Under Prove To Be A Success?

12 JULY 2013
Will Far East Orchard’s Foray Down Under Prove To Be A Success?
By Jade Lee and Shane Goh

Since Far East Orchard (FE Orchard) announced its restructuring plan in June last year, its stock has surged more than 60 percent to close at $2.06 on 7 July 2013. With the firm receiving the nod from shareholders on its joint ventures (JVs) to foray into Australia, can we expect more good news from its partnerships with Toga Group and The Straits Trading Company (STC)?

Following a strategic business transformation into hospitality management and healthcare real estate in July last year, FE Orchard, formerly known as Orchard Parade Holdings, is now ready to soar higher with its redefined businesses of 93 units of medical suites and the entire hospitality management segment of Far East Organization.

Not resting on its laurel, FE Orchard plans to expand its hospitality management business and obtain a strong foothold in Australia. In fact, the firm has made a foray into Australia through the joint venture partnerships with Australia-based Toga, and the SGX-listed STC. Subsequently, this has brought FE Orchard to be one of the largest hospitality operators in Australia, increasing its portfolio from three to nine brands and an enlarged hospitality platform of 80 properties with more than 13,000 rooms to date.

Australia – The Place To Be
The decision to foray down under comes with no surprise. While Singapore remains FE Orchard’s primary market (eight hotels and nine services residences), the booming hospitality industry in Australia, which is underpinned by steady increase from US and Chinese tourists, is hard to be overlooked.

In truth, Australia’s short-term visitors’ arrival for the last 12 months ended April 2013 stood at 6 million while domestic tourists for the year ended December 2012 stood higher at 74 million, cited Australian Bureau of Statistics. This definitely bodes well for FE Orchard, where it gets to tap on the Toga’s extensive hotels and serviced residential services across Australia along with the options for five of its hospitality assets, as well as STC’s three Rendezvous hotels that are located in the prime areas of Perth and Melbourne.

With an interest of 30 percent in the JV company, STC will also attribute 13 hotel management contracts in the Asia Pacific region while FE Orchard will contribute 25 hospitality contracts and $76 million cash. The JV company would enter into a 50:50 trust special purpose vehicle with Toga. Currently, Toga operates approximately 6,800 rooms across more than 50 hotels under prominent brands such as Medina, Adina, Vibe and Travelodge Hotels.

Leveraging Expertise
Diversification remains a crucial strategy for FE Orchard to achieve recurring revenue and profit streams. The firm emphasised that it expects a top line contribution of 60 percent from its property development arm, down from its present 78 percent, with the bulk of the balance derived from the hospitality management following the completion of the JV.

Presently, the hospitality management division elicits majority of its turnover from domestic sources with an agreement in Malaysia rounding up its existing portfolio. Moving forward, FE Orchard has seven contracts in the pipeline, including two in Bali and Bintan, Indonesia.

Furthermore, the addition of the Rendezvous brand to FE Orchard’s rank enables the firm to carve out a slice of the higher end market while Medina and Adina from Toga gels smoothly with FE Orchard’s existing values and clientele, allowing the group to target customers across a range of market segments.

Additionally, this initial venture into Australia, coupled with a small European and New Zealand exposure, provides the firm with an improved access to future growth opportunities in overseas hospitality-related investment.

All’s Well That End Well?
Truth be told, starting and running a business comes with risks. As such, while we may get to see synergies as well as growth in FE Orchard’s recurring income stream upon completion of the joint venture, we remain cautious about all three organisations’ ability to fully draw out the benefits from each individual’s offering.

Specifically, investors should take note that the hospitality arm of STC has been in the red for the past three financial years. Notably, the hospitality management arm of STC has embarked on an asset enhancement and rebranding initiative since October 2011, explaining their enlarged loss of $36.2 million last year compared to a smaller loss of $5.8 million in 2011.

Meanwhile, operating in an overseas country will naturally be accompanied with foreign currency fluctuations. In the case of Australia, the Aussie dollar has fallen since the start of the year by approximately 8.4 percent against the Singapore dollar as of 3 July.

As the JV nears the impending completion of STC’s hospitality management asset enhancement and rebranding initiative, the verdict on the collaboration hangs in the balance of FE Orchard and their new partner, Toga’s ability to turn STC’s loss making segment around. Shall we expect FE Orchard chief executive officer, Lucas Chow’s pedigree in transforming SingTel from a domestic operator to a strong regional player to be seen in FE Orchard this time round?  Let us sit tight and see how his experience and expertise will come into play as FE Orchard threads through the obstacles.

Publish date: 12/07/13

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