CHANGI THE JEWEL IN THE CROWN
Boost from Crown Plaza Changi Airport acquisition.
- We reiterate our BUY call with TP of S$1.01.
- Compared to other Singapore-focused hospitality REITs which face headwinds from a tepid recovery in tourist arrivals, OUEHT should deliver a stable DPU due to the acquisition of 320-room Crown Plaza Changi Airport (CPCA) and its 243-room extension (CPEX).
- Combined with an attractive 7.2% yield, OUEHT’s share price should continue to outperform other hospitality REITs.
Portfolio with strong market positioning.
- OUEHT’s portfolio benefits from the strong market position of its two hotels.
- CPCA, which faces limited competition in the Changi Airport submarket, provides the REIT with a growing income stream.
- Furthermore, while Mandarin Orchard (MOS) faces some near term headwinds, its superior location in Singapore’s main tourist precinct should see the property continue to outshine its competitors.
- Over the last two years, MOS has generated 8% higher RevPAR than other upscale hotels.
Visible acquisition pipeline.
- OUEHT has a visible acquisition pipeline, through its sponsor OUE Limited, which owns the serviced residences at OUE Downtown and a 30% stake in Marina Mandarin.
- Furthermore, the CEO of OUEHT, Mr Chong Kee Hiong has demonstrated a strong acquisition track record during his time as CEO of Ascott Residence Trust, growing the portfolio from S$856m at IPO in 2006 to c.S$3bn at end-2011.
Valuation:
Pricing in weak corporate demand.
- Contrary to our expectations, June was weak despite the SEA Games according to our industry contacts. Thus, we have lowered our RevPAR growth estimates for MOS from -2% to -5%. The result is a 1- 3% cut to our FY15-16F DPU.
- However, as we roll forward our valuation to FY16, our DCF-based TP is raised to S$1.01 from S$0.98.
- Our estimates incorporate S$125m of equity raising (at S$0.905 per unit) to fund the purchases of CPCA/CPEX.
Key Risks to Our View:
Competitive landscape.
- The key risk to our view is a weaker- than-expected outlook for the Singapore hospitality market, if our projected 3% recovery in tourist arrivals does not eventuate.
- In addition, we expect the contribution from CPCA to offset weakness from Mandarin Orchard.
- However, if CPCA underperforms, this will pose a downside risk to our estimates.
Potential Catalyst: Recovery of the Singapore hospitality market and further acquisitions.
Where we differ: Below consensus on forecasts dip in RevPAR for Mandarin Orchard.
(Mervin SONG CFA, Derek TAN)
Source: http://www.dbsvickers.com/
