OUE Hospitality Trust - OCBC Investment 2015-11-20: Still cautious; lowering our FV

OUE Hospitality Trust - OCBC Investment 2015-11-20: Still cautious; lowering our FV OUE HOSPITALITY TRUST SK7.SI 

OUE Hospitality Trust: Still cautious; lowering our FV 

 Indonesian arrivals remain weak 
 Diversifying customer base 
 Cautious on outlook 

Indonesian tourist arrivals remain lacklustre 

  • Visitor arrivals from Indonesia to Singapore continue to be lacklustre, as illustrated by the 9.2% YoY dip for the month of Sep. 
  • This has culminated in an overall 11.0% decline in Indonesian tourist arrivals to 2.0m from Jan-Sep this year, with only one month of positive YoY increase recorded in Jul. This can be attributed largely to Indonesia’s slowing economic growth and the relatively strong SGD. 
  • OUE Hospitality Trust (OUEHT) has been impacted partially by this, as we believe Indonesian tourists contribute ~25%-30% of its room nights occupied. 
  • Management updated us that it did experience lower room nights from its Indonesian customers in 3Q15, but the decline was less than the overall industry dip. 
  • We also note that management has been putting in efforts to diversify its customer profile, with encouraging numbers from India, South Korea and longer haul regions such as Europe and U.S. 

Retail segment showing signs of fatigue 

  • During OUEHT’s recently reported 3Q15 results, it managed to register a YoY increase of 14.6% and 4.6% for its gross revenue and DPU to S$32.7m and 1.72 S cents, respectively. However, growth was underpinned largely by contribution from Crowne Plaza Changi Airport Hotel (CPCA), which was acquired on 30 Jan this year. 
  • Organically, NPI from Mandarin Orchard Singapore Hotel (MOS) and OUEHT’s retail segment were both flat on a YoY basis. 
  • Although passing rents for Mandarin Gallery (MG) increased from S$23.90 psf per month in 3Q14 to S$25.00 psf per month in 3Q15, the average rental reversion figure for leases signed continued to moderate, coming in at 6%, versus 10% in 2Q15 and 25% in 1Q15. 21% of MG’s NLA is due for renewal in 4Q15, as at 30 Sep 2015. 
  • Nevertheless, OUEHT managed to secure Michael Kors and Victoria’s Secret as key tenants in FY16, with long-term leases signed for seven and ten years, respectively. 

Reiterating HOLD 

  • We believe the muted hospitality sector outlook from both demand and supply factors warrants us to apply a lower terminal growth rate assumption of 1% (previously 2%) in our DDM. This causes our fair value estimate to decline from S$0.88 to S$0.80. 
  • Maintain HOLD. 

Wong Teck Ching Andy OCBC Securities | http://www.ocbcresearch.com/ 2015-11-20
OCBC Securities Analyst Report HOLD Maintain HOLD 0.80 Down 0.88