OUE Hospitality Trust - DBS Research 2016-01-06: In the right part of town

OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - In the right part of town

We reiterate our BUY call with a revised TP of S$0.91.
Despite the expected headwinds in the Singapore hospitality market, we believe OUEHT is the best-positioned Singapore-focused hospitality REIT.
Its Mandarin Hotel is located in Orchard Road which will not see any new hotel supply in 2016.
In addition, heading into 2016, OUEHT should benefit from the full-year contribution from its recent acquisition of Crown Plaza (CPCA) Changi Airport and upcoming purchase of its extension wing (CPEX). CPCA also has the benefit of being the only hotel within the Changi Airport submarket.

OUEHT’s share price has corrected over the past six months due to the overhang from the potential capital raising to fund the acquisition of CPEX for S$205m. With the acquisition likely to take place in 2Q16, in line with the expected completion of CPEX, this overhang should soon be lifted.
Moreover, this risk in our view has largely been priced in, with our FY16F yield of 8.5% already imputing a S$125m equity raising at S$0.70 per share which is at a discount to the current low share price.

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 by end-2011.

Given the still weak outlook for the Singapore hospitality market, we lowered our FY16F RevPAR growth estimates for MOS from +1% to -2%.
After incorporating S$125m equity raising at S$0.70 per share, which is lower than our earlier S$0.88 estimate, we have cut our FY15-16F DPU by 3-5%.
Our DCF valuation is likewise reduced to S$0.91 from S$0.98.

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 in FY16 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.

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-01-06

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.91 Down 0.98