CDL Hospitality Trusts - RHB Invest 2016-08-01: A Delayed Turnaround

CDL Hospitality Trusts - RHB Invest 2016-08-01: A Delayed Turnaround CDL HOSPITALITY TRUSTS CDLHT J85.SI 

CDL Hospitality Trusts - A Delayed Turnaround

  • We now expect the competitive hotel trading environment to persist until 2H17(previously, end-2016) amidst weakening corporate demand and continued supply pressures. The stock has done well since mid-March, outperforming the STI by 10% YTD. 
  • While valuations remain cheap (FY16F/17F dividend yield of 6.6% and 7%) the stock lacks near-term catalysts. 
  • Downgrade to NEUTRAL with SGD1.47 TP (vs SGD1.48, 0% upside).

Competitive pressure to persist a little longer. 

  • While visitor arrivals to Singapore rose 13.3% YoY YTD May, average stay length grew only 4.8% YoY, indicating shorter visitor stay. 
  • CDL Hospitality Trust’s (CDLHT) revenue per available room (RevPar) declined 9.2% YoY in 2Q16 despite higher visitor arrivals. Key reasons for this are continued competitive pressures due to new supply, and the softening corporate market. 
  • Its ongoing asset enhancement initiatives (AEIs) in two of its hotels and absence of demand from the Southeast Asian Games (SEA Games) (2015) also impacted performance. 
  • Looking ahead, we expect the weakness to persist, as incoming hotel supply and a weakening corporate market (50% of demand) are likely to exert pressure on RevPar. With hotel supply easing by 2018, we expect a sector turnaround in 2H17.

Not much impact from Brexit

  • Not much impact from Brexit; Japan and New Zealand markets remain bright spots, on the back of good market dynamics. 
  • CDLHT also signed a new lease structure (3+3+3 years) for its New Zealand hotel (to be rebranded as the Grand Millennium Auckland) with higher variable rents to capture the upside potential. Management notes it hasn’t seen any cancellations in corporate demand in its UK hotel post-Brexit. 
  • On the retail front, its repositioned Claymore Connect has achieved 90% occupancy.

Expect delayed turnaround; reduce to NEUTRAL. 

  • While we previously expected CDLHT’s RevPar to turn around by end-2016, deteriorating corporate market conditions and continued supply pressures delay our expectations to 2H17. Consequently, we lower our DPU assumption by 3% for 2016, and TP by 1% to SGD1.47. 
  • The stock has done well, climbing 11% YTD. The key upside catalyst would be a pick-up in global corporate demand, while the key downside risks to our assumption are supply pressures and collapse in the global economy.

2Q16 results slightly below expectations, on weaker key market performance. 

  • 2Q16 and 1H16 DPU declined 0.9% and 5.1% YoY respectively, to 2.23 cents/4.45 cents. This was below our expectations, meeting 44% of our full-year forecasts. The weaker performance was mainly due to the underperformance of its hotel portfolio in its core Singapore and Maldives markets.
  • On the positive side, Japan and UK hotels contributed strongly, offsetting some of the underperformance. CDLHT managed to refinance its SGD201m in loans maturing this year, and has no refinancing requirements till 2018. 
  • Overall, we expect 2H16 to be slightly better, compared to the first half of the year.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-01
RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 1.47 Down 1.48