Eagle Hospitality Trust falls to all time low price amid all time low RSI (28 Oct 19)

Dear all,

S&P500 hit a near intra-day record high at 3,027 on 25 Oct 2019 (one-point shy of its intra-day record high 3,028 on 26 Jul 2019). However, such optimism and risk on sentiment cannot be felt on this SGX listed stock Eagle Hospitality Trust (“EHT”). It fell 16% last Friday to close $0.545. This is an all-time low price since its IPO (IPO offer price US$0.780) on 24 May 2019.

Let’s take a look why this EHT has under-performed and why it has caught my attention this week.

 

Reasons why EHT has underperformed till date

The below list of likely reasons is not exhaustive. It is just based on my personal view what may have caused EHT’s under-performance.

1) Under-subscribed for its IPO

Based on my memory, it is one of the extremely rare reits which is under-subscribed. This may be due to a myriad of reasons such as

a) It comes on the back of ARA US Hospitality Trust which IPO just before EHT. Thus, it may be reasonable to postulate that some demand may have gone to ARA US Hospitality Trust;

b) EHT’s sponsor, Urban Commons (“UC”) is arguably less well known to Asian investors;

c) Market does not like one of its key assets namely Queen Mary which some investors believe that significant capital investment may be required.

2) Major shareholders have been selling the shares

For example, Wealthy Fountains (under Mr Tong Jinquan) has pared its stake to below 5% by disposing 10m EHT shares at US$0.655 on 19 Sep 2019. Compass Cove Assets Limited (under Mr. Norbert Shih Hau Yuan) has pared its stake to around 12.4% by disposing 5m EHT shares at US$0.675 on 8 Oct 2019;

3) There was a negative article on EHT last week on Queen Mary

Based on an article on The Edge dated 23 Oct 2019, UC may be in potential default after receiving a letter from Long Beach that UC had not fulfilled its lease obligations to maintain Queen Mary. EHT subsequently halted its shares and made an announcement that UC is not in default and UC is in the midst of preparing a reply to Long Beach. According to media, the letter by Long Beach gave UC until 31 Oct to reply, otherwise, UC may be in default.

 

With all the seemingly negative news, what attracts me to EHT?

There are two main reasons why EHT attracts me.

1) All time oversold with record low RSI

Based on Chart 1 below, it is evident that EHT has been entrenched in a strong downtrend. Price decline has been accompanied with above average volume which is rather bearish. Last Friday, EHT slumped a whopping 15% on record volume of 32.8m shares. Indicators are extremely oversold. RSI has dipped to a record low level at 10.8. MFI closed at 3.5. This may be a selling climax where the “last” sellers rush in and buyers capitulate. Based on chart, it is likely that downside may be limited in the near term as extreme oversold pressures build.

Near term supports: S$0.540 / 0.525 / 0.500

Near term resistances: S$0.595 / 0.63 – 0.635 / 0.650

Chart 1: EHT closed at all time low price amid record low RSI

Eagle chart 25 Oct 2019

Source: InvestingNote 25 Oct 19

2) Downside may be limited based on analysts

Based on a UOB research report dated 25 Oct 2019 (click HERE), they have a base case scenario target price of around $1.02 for EHT with FY20F distribution per unit (“DPU”) at US$0.066 / share and NAV / share at US$0.870. In this case, distribution yield is around 12.1%.

In the worst-case scenario where UOB Kayhian assumes that Queen Mary does not contribute to EHT’s valuation and rental income, they cited a reduced target price of US$0.80 with FY20F DPU at US$0.0512 / share and NAV / share at US$0.690. In the worst-case scenario, distribution yield will drop to around 9.4%.

Separately, a KGI report dated 25 Oct 2019 (click HERE) has a base case scenario target price of around US$0.720. In the worst-case scenario where it ignores contribution from Queen Mary, its target price will drop to around US$0.560 and a distribution yield of almost 8%. In this aspect, KGI believes that EHT has limited downside.

3) EHT has put forth some convincing data to clarify some of the issues raised by the media

Based on EHT’s announcements dated 28 Oct 2019 (click HERE and HERE), EHT clarified several noteworthy points which I have outlined below:

a) The City clarified in a written letter dated 25 Oct 2019 that its 1 Oct 2019 letter is a formal request for information by the City and is not a notification of default. The City also confirmed receipt of UC’s reply to address the concerns raised by the City’s 1 Oct 2019, and is confident that UC now has a plan in place to resolve the remaining structural issues. In addition, the City said that it values its partnership with UC to activate, maintain, and preserve the historic Queen Mary on behalf of the residents of Long Beach;

b) The Marine Survey of the Queen Mary done on 25 Jan 2017 estimated the total cost of ship repairs could range from US$235m to US$289m. In addition, it estimated that the work would take approximately five years to complete, with some 75% of repairs deemed “urgent”. To this, EHT believes that the costs are significantly overstated. For example, the Marine Survey estimated the total cost for “urgent hull repairs” to be between US$175m – US$213m but UC managed to address substantially all of such urgent hull repairs at less than US$1.1m.

c) UC, and not EHT is responsible for making repairs and maintaining the Queen Mary property (i.e. the Sponsor pays for the repairs and not EHT). EHT also notes that the Queen Mary benefits from multiple capital reserve mechanisms to support continued investment in the ship. Furthermore, the current repair work is not expected to have any material adverse impact on the operations of the Queen Mary, and the ship remains operational and open to guests.

 

Risks

The below list of risks is not exhaustive.

1) I am not familiar with EHT

This is my first time looking at EHT. Suffice to say that I am not familiar in EHT’s fundamentals (my main basis is mostly technical). Readers should do their own due diligence and exercise their independent judgement.

2) Presence of selling pressure

Based on the SGX announcements over the past few months, major shareholders seem to be paring their stake in EHT. I do not know the reason why they are paring their stake, but it may be due to tax issue (just my guess which I cannot verify)

3) Price performance may also depend on the outcome of UC vs Long Beach

Depending on the outcome of UC vs Long Beach, it is reasonable to assume that the outcome is likely to be a driver of its share price. An adverse outcome may fuel more selling pressure and vice versa.

4) There is no rule that RSI cannot go below 10.8

Although RSI is already at an extremely oversold level of 10.8, this does not mean that it will not drop further. However, on the balance of probability, it is less likely that EHT can continue its drop without some form of bounce, as oversold pressures escalate, and amid a positive analyst base.

 

Conclusion

Its all-time oversold chart and positive analyst reports (given their worst-case scenario seem to indicate limited downside potential) attract me to EHT, for a punting play only. I’m vested and only aim for a couple of bids of profit if any. It is noteworthy that I am not familiar with EHT’s fundamentals, couple with selling pressure since IPO, and the outcome of UC vs Long Beach are some potential risks to take note. Readers, as usual, please do your own due diligence and exercise your independent judgement.

 

P.S: I have already notified my clients to take note of EHT last Friday.

 

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