SG Hospitality - OCBC Investment 2016-10-14: Continued corporate demand weakness

SG Hospitality - OCBC Investment 2016-10-14: Continued corporate demand weakness Hospitality REITs CDL HOSPITALITY TRUSTS J85.SI  ASCOTT RESIDENCE TRUST A68U.SI  FAR EAST HOSPITALITY TRUST Q5T.SI 

SG Hospitality - Continued corporate demand weakness

  • O&G and Finance sectors under pressure.
  • 9M16 inbound M&A declines.
  • FEHT and CDLHT with corp. exposure.

Serviced Residences (Corporate): HQ relocations and layoffs 

  • Media reports and statistics seem to point to a continued deterioration of corporate demand. For serviced residences (SR), we look at reported headquarter relocations and layoffs that could have and/or could still affect expat-housing demand. 
  • Within Oil & Gas, McDermott, Technip, Subsea 7, Saipem, KTL Global have or are in the process of relocating their Singapore operations to Malaysia. 
  • Within Finance, Goldman Sachs, Bank of America, ANZ Banking Group, UBS, and Macquarie Group are among firms that have either cut jobs or announced retrenchment plans in 2H16. 
  • We remain cautious on our expectations for SR RevPAR.

Hotels (Corporate): Trend of fewer inbound deals and events 

  • For hotels, we note that the number of inbound deals and events held locally has also dropped. 
  • Beyond the layoffs mentioned above – which give an indication of expectations on business activity going forward – inbound M&A activity appears to be soft. According to Dealogic, 9M16 inbound M&A volume into Asia-Pacific from the Americas dropped 5% YoY to US$30b, while that from EMEA dropped 44% YoY to US$12b. 
  • Going forward, we expect this trend to continue at least until 1Q17 given the regional uncertainties associated with Brexit and the US Presidential Election. 
  • Within the O&G sector, the number of and funding for exhibitions has also dropped this year according to anecdotal accounts. As a broad indication of economic activity here, the Ministry of Trade and Industry expects Singapore’s GDP for 2H16 to come in lower than the 2.1% seen in 1H16 . 
  • Going forward, we expect corporate demand to remain soft for both hotels and SR.

Soft 3Q results expected for REITs under coverage 

  • We expect YoY RevPAR declines for both hotels and SR in 3Q, albeit more positive than the - 8.7% to 2.4% growth range seen in 2Q. 
  • REITs under our coverage that have Singapore SR exposure include Far East Hospitality Trust (FEHT) [HOLD; FV: S$0.64] (corp. ~85% of 2Q SR rev.; SR ~14% of total rev.) and Ascott Residence Trust [BUY; FV: S$1.24] (SG SR ~7% of total rev.). 
  • REITs under our coverage with hotel assets meeting corporate demand include FEHT (corp. ~38% of hotel rev; hotels ~64% of total rev.) and CDL Hospitality Trust [BUY; FV: S$1.53] (SG hotels ~62% of total NPI). 
  • Do note that our 2H16 expectations are currently factored into our valuations. 
  • Maintain NEUTRAL on the sector.

Deborah Ong OCBC Investment | 2016-10-14
OCBC Securities Analyst Report BUY Maintain BUY 1.24 Same 1.24
BUY Maintain BUY 1.53 Same 1.53
HOLD Maintain HOLD 0.64 Same 0.64