DBS Group Research 2015-07-16: CDL Hospitality Trusts - HEADWINDS IN SINGAPORE. Maintain HOLD.


Headwinds from growth in Singapore room supply. 

  • We have a HOLD recommendation on CDREIT given our cautious stance on the Singapore hospitality market. 
  • Over 2015, CDREIT’s core Singapore operations (c.68% of NPI) faces the challenge of 5- 6% increase in new room supply. 
  • With projected 3% growth in tourist arrivals, insufficient to offset the new supply, we estimate a 5% dip in CDREIT’s Singapore RevPAR. 

Partially offset by contribution from Japan and reopening of Claymore Link. 

  • While we are cautious on CDREIT’s Singapore operations, we forecast DPU to remain stable in FY15F DPU due to the contribution from two Japanese hotels acquired in late 2014. 
  • In addition, CDREIT should benefit from the reopening of Claymore Link mall from 2Q15. 

Strong balance sheet offers medium-term upside. 

  • Despite the near-term challenges, we remain positive on CDREIT’s medium- term prospects. 
  • With gearing at c.32%, below CDREIT’s optimal gearing of 35-40%, further acquisitions pose upside risks to our estimates. 


Lacking catalyst. 

  • Given feedback from our industry contacts that corporate demand remains soft and the expected boost from the SEA Games did not eventuate, we reduced our Singapore RevPAR estimates from -4% to -5%. This translates into a 1-2% cut to our FY15-16F DPU. 
  • Our TP has also likewise been reduced to S$1.66 from S$1.76, on the back of a reduction in our earnings estimates. 
  • We have also switched to a DCF valuation methodology from DDM, to be more consistent with our other hospitality REITs. 

Key Risks to Our View: 

Better-than-expected demand supply outlook in Singapore. 

  • The key risk to our view is a better demand-supply outlook for the Singapore hospitality market, resulting in an improved RevPAR performance compared to our estimates. 
  • This may be due to delays in opening of new hotels this year and/or better- than-expected tourist arrivals on the back of events celebrating Singapore’s 50th year of independence. 

Potential Catalyst: Recovery of the Singapore hospitality market and acquisitions

Where we differ: We are in line with consensus for FY15, however we are below consensus in FY16 given 6-7% growth in new room supply that year.

(Mervin SONG CFA, Derek TAN)

Source: http://www.dbsvickers.com/