OUE Hospitality Trust - A Terminal Boost
- We upgrade OUEHT to BUY (from Neutral) as we see sector headwinds receding in 2H17, and catalysts emerging.
- Key drivers ahead are:
- Opening of new Changi Airport Terminal-4 in 2H17;
- Hotel supply headwinds tapering off post 2018;
- Valuations remain attractive with FY17F yield of 7.3% and P/BV of 0.9x.
- We expect a potential turnaround at the hotel segment in 2018, with supply pressures abating.
- Upgrade to BUY with higher TP of SGD0.76 (from SGD0.70, 10% upside).
Key beneficiary of Changi Airport’s new terminal.
- Construction of Changi Airport’s Terminal-4 (T4) has been completed and is slated to open early 2H17. T4 would be able to handle 16m passengers pa bringing total annual capacity to 85m.
- One of the direct beneficiaries of this new terminal would be OUE Hospitality Trust’s (OUEHT) Crowne Plaza Changi Airport Hotel (CPCA), being the only hotel located within the airport premises. CPCA has a total of 563 rooms (including the extension) with an occupancy rate of ~70% in 4Q16.
- With the opening of the new terminal, we expect airlines to increase frequencies and add new destinations. This should result in higher volumes of airline crew and transit passengers, who are among CPCA’s key customers. We expect revenue per available room (RevPAR) to increase 5% this year, and 9% next year.
Demand remains resilient with steady growth in visitor arrivals.
- Visitor arrivals and visitor days grew 4.8% and 4.9% YoY respectively in Jan 2017, based on the latest Singapore Tourism Board data.
- Overall hotel RevPAR grew 2.7% YoY, driven by higher room rates although growth came only from the luxury hotel segment.
- While 2017’s hotel outlook remains challenging (FY17F RevPAR to decline 2-5%) mainly stemming from supply pressures, we expect 2018 to be a turnaround year with very little supply in the pipeline.
Hotel supply tapering off post 2017.
- 2017 would see an estimated 3,767 rooms (5.9% of inventory) coming on stream based on Howrath HTL and CDL Hospitality Research data, which should put pressure on RevPAR. However, relief is in sight for hoteliers with only 69 rooms expected in the pipeline for 2018 .
- Over the next three years, hotel room supply is expected to grow at a CAGR of 2.7% and we expect demand growth (3-5%) to outstrip supply growth.
Limited retail supply on Orchard road.
- Mandarin Gallery’s (MG) occupancy improved to 94.1% in 4Q16 (3Q16: 89%) with the moving in of its two new tenants Michael Kors (3Q16) and Victoria Secret (4Q16). This should contribute positively in 2017 and help increase shopper traffic to the mall.
- While overall retail climate remains challenging, the lack of new retail supply in the Orchard area mitigates some of the downside risk.
- About 18% of its leases (by rent) are due for renewal in 2017, for which we expect negative rent reversions of 5-15%.
Upgrade to BUY with higher TP of SGD0.76.
- We increase our FY18-19 DPU forecasts by 1-3% factoring in higher RevPAR growth, and adjust our TP accordingly.
- Our DDM-based TP is derived based on a COE of 7.8% and TG of 2%.
- Valuations remain attractive with the stock offering FY17F/FY18F yields of 7.3% and 7.5% respectively.
- Key upside catalysts ahead include the successful opening of the new terminal and continued growth in visitor arrivals.