OUE Hospitality Trust - CIMB Research 2016-09-21: Sensitising Crowne Plaza Changi Airport

OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - Sensitising Crowne Plaza Changi Airport

We expect sequential quarterly DPU to improve hereon, driven by inorganic contribution from Crowne Plaza Changi Airport Extension (CPEX) and completion of retail fit-outs.
Michael Kors (MK) and Victoria’s Secret (VS) have signed long lease periods of seven and 10 years, respectively.
We project hospitality income to grow 9% yoy in FY17. We expect RevPAR for Mandarin Orchard Singapore (MOS) to stabilise; and a higher occupancy of 80% for the enlarged CPCA-CPEX property.

In our worst case scenario, a slower-than-expected ramp-up of CPCA-CPEX would result in a 6% decrease in FY18F DPU.
Preferred pick in the hospitality sub-sector. Maintain Add, with lower DDM-based TP (S$0.75).

We reiterate our forecast of sequential improvement in OUEHT’s quarterly DPU hereon.
Chiefly, the opening of Michael Kors (MK) and Victoria’s Secret (VS) in Mandarin Gallery (MG) in 2H16 should plug the income vacuum experienced in 1H16.
Secondly, Mandarin Orchard Singapore (MOS) would be more competitive following the refurbishment of 350 of its 430 guest rooms. Thirdly, we expect incremental contribution from Crowne Plaza Changi Airport Extension (CPEX) as its acquisition was completed on 1 Aug.

We expect retail income to bounce back, up 12% yoy to S$35m in FY17F, with the opening of MK in 3Q16 and VS in 4Q16. MG would house both brands’ first flagship store in Southeast Asia. Accordingly, MK and VS together account for c.15% of MG’s NLA of 125,293 sq ft, and we expect the two tenants to contribute 30% to the mall’s retail rental income.
Additionally, MK and VS have signed long lease periods of seven and 10 years, respectively; this would enhance OUEHT’s income stability.

Underpinned by their respective strategic locations, OUEHT’s hotel properties should hold up better than those of its peers, in our view. The proof is in the pudding, and OUEHT’s 1H16 RevPAR outperformed those of its peers CDREIT and FEHT.
All in, we project hospitality income to grow 9% yoy to S$99m in FY17F, underpinned by full-year contribution from CPEX. We expect RevPAR for MOS to stabilise in FY17, and a higher occupancy of 80% for the combined CPCA-CPEX asset (FY16F: 70%).

One of the “unknowns” to our projections would be performance of the combined CPCA-CPEX asset. This is especially so as there is no track record for the enlarged property.
In our worst case scenario, we estimate that an uniform 10% pts cut in the occupancy profile (assumed occupancy would then be 50% for FY16F, 60% for FY17F and 80% for FY18F) would result in a 6% decrease in FY18F DPU. We also conclude that because of the income support buffer, our projections for FY16 and FY17 are relatively secure.

Altogether, we project 9.8% yoy growth in NPI for FY17, propelled by the opening of MK and VS (accounting for 3% yoy growth in NPI) and full-year contribution of CPEX (accounting for 6.7% yoy growth in the NPI).
As we believe OUEHT is poised to post the strongest DPU growth, it is our preferred pick in the hospitality sub-sector.
Maintain Add as we roll forward our DDM-based valuation.
Downside risk could be unexpected weakness from MOS.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2016-09-21

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