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

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.

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.

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 | http://www.ocbcresearch.com/ 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