OUE Hospitality Trust - CIMB Research 2016-08-02: Things should look up from here

OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - Things should look up from here

1HFY16 DPU of 2.03 Scts (-32% yoy) was below consensus and our estimate, forming 38% of our FY16 forecast. 2Q16 DPU was at 17% of our FY16F.
Negative variance stemmed from weaker-than-expected MOS and retail.
Completed acquisition of CPEX on 1 Aug 16; contributions from 3Q16.

Quarterly DPU to improve on inorganic contribution and completion of retail fit-outs.
OUEHT is now our preferred pick in the hospitality sector, offering highest DPU growth and FY17 yield. Upgrade to Add with higher DDM-based target price.

Admittedly, 2Q16 results underwhelmed, with weakness at Mandarin Orchard Singapore (MOS) rather disappointing. Nevertheless, growth drivers down the road have become more concrete, and we turn positive on the stock.
In 2Q16, revenue slipped 3% yoy and NPI slid 4% yoy due to lower contribution from MOS and retail (Mandarin Gallery or MG).
Due to higher net finance costs (+24% yoy), distributable income fell 13% yoy. DPU of 2.02 Scts fell by a greater extent (-32% yoy) due to the rights issue in Apr 16.

Hospitality NPI for 2Q16 decreased 7% yoy. The decline was mainly due to the 8.3% yoy decline in RevPAR registered by MOS. While RevPAR weakness was in line with peers, we had expected more from the well-positioned MOS.
In line with its price leadership positioning along Orchard (plus its desire to not spark a downward spiral in rates), the Manager maintained its strategy of holding ADRs at the cost of occupancy.
Occupancy came down to the low-80s, resulting in the RevPAR decline.

CPCA continue to outperform, with RevPAR declining only 2.6% yoy. With limited supply in Changi, CPCA remains the standout hotel in the proximity. However, island-wide supply pressures caused the Manager to reduce rates marginally, resulting in the drop- off in RevPAR. Occupancy for CPCA is in the high-80s.

The acquisition of CPEX was completed on 1 Aug and we expect contribution from 3Q16 onwards. Due to the increased room inventory, we expect blended occupancy for CPCA+CPEX to be in the low 70s for the first six months, before improving to 85% in FY17.
Nonetheless, the Sponsor would provide income support of S$7.5m over the next three years to ensure that rental income from the combined properties would meet the S$29m-30m p.a. targets.

Retail NPI fell 19% yoy due to lower physical occupancy of 79.1% vs. committed occupancy of 87%. Rental reversions fell 17% with 4.9% of NLA renewed. This was due to changes in lease structures towards turnover rents, micro-location factors and challenging landscape.
We expect MG to bounce back in FY17 when Michael Kors and Victoria’s Secret (occupying c.15% of MG’s NLA) open in 3Q16 and 4Q16 respectively.

Sequentially, we expect quarterly DPU to improve due to inorganic contribution and completion of retail fit-outs. MOS would be more competitive too, with room renovations mostly done.
We project OUEHT to have the strongest DPU growth and highest FY17 dividend yield of 7.5% among hotel S-REITs.
We upgrade the stock with a higher DDM- based target price (S$0.79). We cut FY16 DPU forecast due to a weak 2Q and introduce new FY17-18 forecasts.
Downside risk could be unexpected weakness from MOS.

YEO Zhi Bin CIMB Securities | LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-08-02

CIMB Securities SGX Stock Analyst Report ADD Upgrade HOLD 0.79 Up 0.71