OUE Hospitality Trust - Crowne Plaza – a buffer in these tough times
- Current price levels attractive.
- FY17 fwd yield of 7.6%.
- BUY with S$0.75 FV.
FY16 results in line with expectations
- OUE Hospitality Trust’s (OUEHT) FY16 DPU fell 29.6% to 4.61 S cents, or 97% of our forecast, primarily due to the enlarged unit base following the rights issue. FY16 gross revenue was down 1.7% to S$122.5m, or 99% of our forecast, on 2.3% higher contributions from hospitality which outweighed the 11.3% decline in retail revenue.
- OUEHT’s NPI dropped 1.6% to S$107.4m, or 99% of our forecast, while distribution income dropped 5.6% to S$82.5m, or 97% of our forecast.
CPCA ramp-up looks promising; catalysts await with Changi Airport expansion
- Mandarin Orchard Singapore (MOS) posted a 2.4% drop in gross revenue to S$71.7m as RevPAR declined from S$230 in FY15 to S$217.
- On the other hand, Crowne Plaza Changi Airport (CPCA) posted a 26.4% gain in gross revenue to S$18.2m, as it was boosted by contributions from the recently acquired extension. According to management, CPCA has been ramping up steadily with average daily rates and occupancy levels increasing from 4Q to Jan. While we are reluctant to expect an immediate boost from the opening of Terminal 4 in 2H17, we view Changi Airport’s capacity expansions as a strong medium-term (two to four year) catalyst for higher contributions at CPCA.
Fair value increases to S$0.75
- Our cost of equity is lowered from 8.0% to 7.9% after incorporating a higher risk free rate of 2.7% (2.4% previously) and applying a lower beta against the market premium. After tweaking our RevPAR and retail rent projections, our fair value increases from S$0.73 to S$0.75.
- As at 31 Dec 2016, OUEHT has a gearing of 38.1%. Against yesterday’s price of S$0.685, OUEHT is trading at a FY17 forward dividend yield of 7.6% and at 89% of NAV.
- Despite the tepid outlook on corporate demand, OUEHT offers value at current price levels. We see CPCA as a unique asset that is less affected by supply injections in the city, and believe it will act as buffer in this tough operating environment before the anticipated recovery in 2018.
- We maintain BUY on OUEHT with a higher fair value estimate of S$0.75.