OUE Hospitality Trust - DBS Research 2016-08-02: Well placed to ride out near term headwinds

OUE Hospitality Trust - DBS Research 2016-08-02: Well placed to ride out near term headwinds OUE HOSPITALITY TRUST SK7.SI 

OUE Hospitality Trust - Well placed to ride out near term headwinds

  • 2Q16 DPU of 0.92 Scts (-35% y-o-y after rights adjustment factor) was below expectations.
  • Negative impact from 8% fall in RevPAR at Mandarin Orchard and dip in occupancy at Mandarin Gallery.
  • Stronger 2H16, from opening of Crown Plaza Changi Airport extension, and new Michael Kors and Victoria Secret stores at Mandarin Gallery.


Boost from timely acquisition. 

  • We reiterate our BUY call with a revised TP of S$0.75. We believe OUE Hospitality Trust (OUEHT) is one of the best-positioned hospitality REITs to ride out the near term headwinds in the Singapore hospitality market due to the timely acquisition of Crown Plaza Changi Airport extension (CPEX). CPEX itself is the only hotel within the Changi Airport submarket and well placed to take advantage of the c.72% expansion in Changi Airport’s passenger capacity.


Opportune time to BUY during earnings lull. 

  • With expectations of an improvement in earnings in 2H16 arising from the acquisition of CPEX and the opening of Michael Kors and Victoria Secret stores, we believe now is the opportune time for investors to gain exposure to a portfolio of well located hotels/malls. 
  • Although its earnings are currently soft, affected by the fit out period at Mandarin Gallery, the Trust would benefit from the potential pick up in the Singapore hospitality market in 2017/2018.


Removal of overhang. 

  • OUEHT’s share price corrected over the past year due to the overhang from 
    1. potential capital raising to fund the acquisition of CPEX, and 
    2. gearing that was over 40%. 
  • However, these concerns have now been addressed, following the recent rights issue which is expected to result in OUEHT’s gearing falling to c.38%.


Valuation:

  • After rolling forward to FY17 but now assuming lower RevPAR performance at Mandarin Orchard, we lowered our DCF-based TP to S$0.75 from S$0.76.


Key Risks to Our View:

  • Competitive landscape. The key risk to our view is a weaker- than-expected outlook for the Singapore hospitality market. 
  • In addition, rents at Mandarin Gallery may fall below expectations if there is a significant deterioration in the Singapore retail scene. 




Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-08-02
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.75 Same 0.75


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