CDL Hospitality Trusts - OCBC Investment 2015-11-26: Negatives priced in, take a leap of faith

CDL Hospitality Trusts - OCBC Investment 2015-11-26: Negatives priced in, take a leap of faith CDL HOSPITALITY TRUSTS CDLHT J85.SI 

CDL Hospitality Trusts: Negatives priced in, take a leap of faith 

 Glimpses of recovery 
 Outlook still uncertain 
 Valuations looking compelling 

Tourist arrivals showing glimpses of recovery 

  • International visitor arrivals to Singapore has shown some glimpses of recovery, as Sep 2015’s 3.0% increase from Sep 2014’s figure marked the fifth consecutive month of YoY growth, albeit coming from a low base, in our view. 
  • From Jan to Sep this year, tourist arrivals are still down marginally by 0.3% to 11.4m. 
  • CDL Hospitality Trusts (CDLHT), which derived 60% of its 9M15 gross revenue from its Singapore assets, has been impacted by the soft tourism scene. Its Singapore hotels’ RevPAR dipped 6.4% YoY to S$176 for 9M15 due to a fall in both occupancy (-0.7 ppt to 88.2%) and average daily rate (- 6.1% to S$199). 

Silver lining from RevPAR growth in Oct 

  • Nevertheless, it is not all doom and gloom, as CDLHT mentioned during its recent results announcement that RevPAR for its Singapore hotels increased by 1.4% for the first 26 days of Oct this year, as compared to the same period last year. 
  • It remains to be seen whether this recovery is sustainable, but we are encouraged by the biennial events which will take place next year, such as the Singapore Airshow. 

Upgrade to BUY on valuation grounds 

  • We pare our FY15 and FY16 DPU forecasts by 2.1% and 2.0%, respectively, on account of the still uncertain outlook ahead for the hospitality sector in Singapore. 
  • We also lower our terminal growth rate assumption from 2% to 1% in our DDM. Consequently, our fair value estimate is cut from S$1.61 to S$1.41
  • Despite our reduced fair value on CDLHT, we now see value emerging at its current share price level (YTD decline of 19.5%), and opine that the market has already priced in the negatives. 
  • CDLHT is currently trading at FY15F and FY16F distribution yield of 7.5% and 7.8%, respectively. The latter is two standard deviations above its 5-year forward mean of 6.6%. 
  • From a P/B perspective, valuations also appear attractive, in our view, as FY15F and FY16F P/B ratio of 0.8x comes in at two standard deviations below its 5-year forward average P/B of 1.1x. 
  • In light of the aforementioned factors, we are upgrading CDLHT from ‘Hold’ to BUY. 

Wong Teck Ching Andy OCBC Securities | 2015-11-26
OCBC Securities Analyst Report BUY Upgrade HOLD 1.41 Down 1.61