Hospitality Sector - OCBC Investment 2017-03-16: Look Forward To 2018

Hospitality Sector - OCBC Investment 2017-03-16: Look Forward To 2018 Singapore Stock Hospitality Sector ASCOTT RESIDENCE TRUST A68U.SI CDL HOSPITALITY TRUSTS J85.SI FAR EAST HOSPITALITY TRUST Q5T.SI OUE HOSPITALITY TRUST SK7.SI

Hospitality Sector - Look Forward To 2018

  • FY16 ended with RevPAR/RevPAU declines.
  • Trading at 5.8% to 7.7% yield.
  • Recovery expected in 2018.



2016 Recap: RevPAR declines ranged from -5.3% to -8.6% for the full year 

  • For counters under our coverage, YoY growth in hotel RevPAR ranged from -5.3% to -8.6% for FY16 and from between -6.8% to -10.5% for 4Q16. 
  • On the other hand, YoY growth in serviced residences RevPAU ranged from -3.0% to -5.8% for FY16 and from -0.6% to -2.3% for 4Q16. 
  • According to the Singapore Tourism Board (STB), industrywide AOR, ARR, and RevPAR grew by -0.9 ppt, -3.6% and -4.6% YoY, respectively. This compares to the 5.3% decline in RevPAR for the whole of 2015. 
  • Looking at FY16 RevPAR trends by segment, the Luxury segment seems to have posted the most resilient performance with its -1.3% drop while economy tier hotels performed poorest with a -5.4% drop. 
  • Overall, key data points to note for 2016 were the 4.3% increase in hotel room supply, 2.2% increase in visitor days (on the back of a 7.7% increase in tourist arrivals), and 2.0% increase in Singapore GDP in 2016.


2017 Outlook: Difficult operational outlook given weak corporate demand 

  • Going forward, we expect leisure demand to show mild to no growth, with STB forecasting a 0% to 2% increase in tourist arrivals and a 1% to 4% increase in tourism receipts. 
  • Corporate demand is also expected to remain soft, with oil majors’ capex forecasted to recover slowly after last year’s decline. Furthermore, our channel checks suggest that some multi-national firms are taking a wait-and-see approach with regard to Trump’s policies before making business decisions (especially those involving longer-term commitments in expat hires). 
  • For FY17, with a forecasted 5.9% growth in hotel rooms and tepid economic growth outlook, RevPARs are expected to continue their decline, and especially so for hotels that rely on corporate demand. 
  • In addition, with FY17 being an odd-numbered year, we expect the MICE events calendar to be less packed for corporates. However, RevPARs are expected to improve in FY18 given our projections of a better supply-demand dynamic.


Challenging year ahead before recovery; collect units on dips

  • Hospitality REITs are currently trading at 5.8% to 7.7% FY17F yield.
  • Given the challenging operational outlook this year, coupled with the prospect of RevPAR/RevPAU stabilization next year, we encourage investors to buy into the sector on dips. 
  • Within the hospitality subsector in the REITs space, our top pick is OUE Hospitality Trust [BUY; FV: S$0.75], as we expect it to be buffered by inorganic contributions from its recent acquisition. Do refer to the S-REITs sector report dated 6 Mar 2017 for our top REIT picks across all subsectors.
  • We maintain NEUTRAL on the hospitality sector.



HOSPITALITY REITS UNDER OUR COVERAGE 


Ascott Residence Trust (ART) – HOLD, FV: S$1.105 

  • With the potential acquisition of Ascott Orchard Singapore (AOS) as well as two serviced residences in Germany with master leases, the proportion of stable income generating-assets within ART’s portfolio is expected to increase from 40% in FY16 to 46% (pro forma). 
  • While DPU will be hit by the time gap between the rights offering and the contributions from AOS (which is expected to come in only in Oct 2017), we expect the Singapore hospitality market to stabilize in 2018 and for AOS contributions to increase over time. Note that while ART is currently trading at a lower expected FY17F yield compared to the other hospitality counters, DPU is expected to increase 18.7% in FY18 on back of a fullyear contribution from AOS.
  • Pro forma numbers suggest that ART would have a gearing of 37% post rights issue and acquisitions. We are currently using a 7.5% cost of equity (assuming at 2.7% risk-free rate) for our valuation of ART.

CDL Hospitality Trusts (CDLHT) – HOLD, FV: S$1.46 

  • Going forward, CDLHT’s Grand Millennium Auckland is expected to continue to benefit from the strong RevPAR growth (24.9% in NZD terms in 4Q16), especially given the revised lease structure with higher variable income. Singapore and Maldives are expected to face challenging operational environments. While we like CDLHT for its broad-based geographical diversification, we find current prices levels fair.
  • As at 31 Dec 2016, CDLHT has a 36.8% gearing. We use a 7.8% cost of equity (assuming at 2.7% risk-free rate) for our valuation of CDLHT.

Far East Hospitality Trust (FEHT) – HOLD, FV: S$0.60 

  • While FEHT appears cheap on a P/NAV basis, we note that the independent valuations conducted on its portfolio appear slightly more aggressive than that for CDLHT despite the similar land lease to expiry. In addition, the Singapore-only exposure makes it more vulnerable to the headwinds currently facing hotels here. Nonetheless, we believe that 2017 will present important opportunities for cost averaging in anticipation of RevPAR/RevPAU stabilization in 2018, and encourage longer-term investors to collect shares at S$0.55 and lower.
  • As a Singapore pure-play with significant exposure to corporate demand, we believe FEHT will be poised to benefit from the expected supply-demand improvement in FY18.
  • As at 31 Dec 2016, FEHT has a gearing of 32.1%. We currently use a 7.7% cost of equity (assuming at 2.7% risk-free rate) for our valuation of FEHT.

OUE Hospitality Trust (OUEHT) – BUY, FV: S$0.75 

  • In 2017, we expect further contributions from Crowne Plaza Changi Airport as well as improved operating results from Mandarin Gallery (MG) following the opening of Michael Kors and Victoria’s Secret last year.
  • 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 Crowne Plaza Changi Airport (CPCA). In terms of risks, we do note the headwinds that have faced retailers on Orchard Road. 
  • With the development of other attractions such as Gardens by the Bay, the competitive prices of luxury goods online, and the lack of differentiated local brand names to attract tourists, we believe Orchard Road’s status as the key tourist attraction within Singapore is challenged. Nonetheless, OUEHT’s CPCA should benefit from long-term growth in tourist arrivals, even if Orchard Road’s attractiveness is slowly eroded.
  • As at 31 Dec 2016, OUEHT has a gearing of 38.1%. We currently use a 7.9% cost of equity (assuming at 2.7% risk-free rate) for our valuation of OUEHT.



HOSPITALITY INDUSTRY PERFORMANCE 

  • In 2016, AOR, ARR, and RevPAR grew by -0.9 ppt, -3.6% and -4.6% YoY, respectively. This compares to the 5.3% decline in RevPAR for the whole of 2015. For FY16, key data points to note were the 4.3% increase in hotel room supply, 2.2% increase in visitor days (on the back of a 7.7% increase in tourist arrivals), and 2.0% increase in Singapore GDP.
  • Looking forward to FY17, with a forecasted 5.9% growth in hotel rooms and tepid economic growth outlook, RevPARs are expected to continue their decline, and especially so for hotels that rely on corporate demand.
  • In addition, with FY17 being an odd-numbered year, we expect the MICE events calendar to be less packed for corporates.
  • Barring an event-related collapse in tourist arrivals and/or a recession, RevPARs are expected to improve in FY18 with better supply-demand dynamics.


SUPPLY-SIDE ANALYSIS: 5.9% growth in FY17 room supply to outpace demand amid a weak corporate environment 

  • The total room stock increased 4.3% in 2016, which was more than the 2.2% increase in visitor days. On top of this, we believe that a weak corporate demand, which typically pay a higher ADR to hotels and forms the bulk of demand for serviced residences, contributed to the 4.6% decline in 2016 RevPAR.
  • Looking ahead to 1H17, we believe the room supply injection will not be adequately matched by a growth in demand. Even though we remain mildly positive on visitor arrivals for this year, the outlook for corporate demand remains weak. Against the room stock of 63,518 at the end of 2016, 2,956 rooms are expected to be added in 1H17 and an additional 811 rooms in 2H17. These would fuel a +5.9% growth in hotel room supply.
  • In 2018, only 69 more rooms are expected.

Airbnb in Singapore 

  • A recent amendment to the Planning Act makes it illegal to rent out private homes for shorter than six months. Nonetheless, the government is considering a new type of private residences for which short-term rentals would be approved. 
  • Airdna, a third-party data provider, currently suggests active listings on Airbnb of around ~7.5K. We believe that the hospitality REITs under our coverage are largely unaffected by the recent changes, as they cater to business travelers, expats, and/or high-end leisure travelers and compete less directly with sharing economy businesses like Airbnb.


DEMAND-SIDE: Corporate demand outlook still soft 

  • FY16 visitor days were up 2.2% YoY on the back of 7.7% increase in tourist arrivals. 
  • Going forward, we expect leisure demand to show mild to no growth, with STB forecasting a 0% to 2% increase in tourist arrivals and a 1% to 4% increase in tourism receipts. 
  • On the other hand, corporate demand is expected to remain soft.

Corporate demand for Hotels 

  • The Ministry of Trade and Industry (MTI) has maintained its 1% to 3% growth forecast for Singapore’s GDP in 2017. 
  • While Brent and WTI prices have improved from their lows, we expect capex from oil majors to remain at low levels given the mild growth rates projected. BP, ConocoPhillips, Exxon, Occidental and Shell are together estimating only an average increase of 9.6% growth YoY in capex for 2017. Combined, the five majors spent US$65.1b in 2016, after having averaged yearly investments of US$101.9b over the preceding six years according to Securing America’s Future Energy (SAFE). We believe the marginal growth in majors’ capex should in turn translate into only slightly better demand for hotel rooms from the O&G sector this year. In addition, according to our channel checks, the number of and funding for O&G exhibitions still seems somewhat depressed given observations YTD.
  • As for finance-driven demand for hotel rooms, our channel checks suggest that training and conference budgets are to stabilize this year.

Corporate demand for Serviced Residences 

  • Last year, media reports and statistics pointed to a deterioration of corporate demand. For serviced residences, we note that the headquarter relocations and layoffs reported last year may lend weakness into expat-housing demand this year, as the effects of these somewhat permanent changes take time to be countered by the expansion plans of other corporates. 
  • Going forward, we note that O&G business is dependent on the capex plans for oil majors, which seems to show only mild growth over 2016 as this point in time. 
  • As for finance-related corporate demand in hotels, we believe some of the multinational firms will take a wait-and-see approach with regard to Trump’s policies before making some of the longer-term commitments in expat hires in the region. As such, we remain cautious on our expectations for serviced residences RevPAU.




Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2017-03-16
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 1.105 Same 1.105
HOLD Maintain HOLD 1.460 Same 1.460
HOLD Maintain HOLD 0.600 Same 0.600
BUY Maintain BUY 0.750 Same 0.750





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