CDL Hospitality Trusts - DBS Research 2016-10-31: Unloved now but offers outstanding value

CDL Hospitality Trusts - DBS Vickers 2016-10-31: Unloved now but offers outstanding value CDL HOSPITALITY TRUSTS J85.SI

CDL Hospitality Trusts - Unloved now but offers outstanding value

  • 3Q16 DPU rose 3% y-o-y to 2.44 Scts due to the acquisition of Cambridge hotel in the UK last year.
  • New Zealand the bright spot amid soft trading conditions in Singapore.
  • Pushing back earnings recovery to 2018 due to persistent weak corporate demand and 6% increase in rooms in 2017 from new hotels.


Attractive valuations. 

  • We maintain our BUY call on CDL Hospitality Trusts (CDREIT) with a revised TP of S$1.59.
  • Although we now expect the Singapore market to only recover in 2018, we believe the current low share price has largely priced in the current downturn and CDREIT offers compelling long-term value given its Singapore portfolio trades on a heavily discounted implied price per key. 
  • In addition, CDREIT offers patient investors an attractive 6.8% yield (based on 90% payout ratio) ahead of the eventual upturn.


Cheapest REIT to ride the eventual upturn. 

  • CDREIT’s implied price per key for its Singapore portfolio stands at less than c.S$500k which is below its replacement cost of c.S$700k, recent market transactions of above S$650k and that of other listed Singapore hospitality REITs of between S$650k and S$1m.
  • Given the quality of the portfolio and CREIT’s long-term track record, we believe this discount is unwarranted. Thus, CDREIT is the cheapest REIT providing exposure to the eventual upturn in the Singapore hospitality market which we project will occur in 2018 as supply pressures ease.


Several mitigating factors during downturn in the Singapore hospitality market. 

  • While CDREIT’s core Singapore market faces a downturn, we believe this will be tempered by higher earnings contribution from New Zealand, following the appointment of Millennium & Copthorne Hotels as the new operator of CDREIT’s Auckland property and the negotiation of a more favourable lease structure. 
  • In addition, we see upside to our DPU estimates should it decide to utilise its S$382m debt headroom for acquisitions.

Valuation

  • Based on our expectations that the Singapore hospitality market will recover in 2018, rather than 2017, partially mitigated by lower assumed interest rates and greater contribution from New Zealand, we lowered our FY17F DPU by 4% and cut our DCF-based TP to S$1.59 from S$1.65.

Key Risks to Our View

  • Weaker-than-expected demand supply outlook in Singapore.
  • The key risk to our view is a weaker-than-expected demandsupply outlook for the Singapore hospitality market.




Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2016-10-31
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.59 Same 1.650




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