OUE Hospitality Trust - CIMB Research 2016-11-01: 3Q16 growth drivers becoming apparent

OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - 3Q16 growth drivers becoming apparent

While 9M16 DPU formed 75% of our full-year forecast, we consider 3Q16 DPU (at 28%) to be slightly above expectations. Expect 4Q16 DPU to be similar to 3Q16’s.
Positive variance sprang from lower-than-expected financial expenses.
Inorganic contribution from CPEX more than offset RevPAR weakness at MOS.
Retail NPI improved 22% qoq as average occupancy improved 10% pts qoq to 89%.

Growth drivers would lead to a 10.5% growth in DPU for FY17F. Reiterate Add with a slightly higher DDM-target price.

OUEHT achieved a 3Q16 DPU of 1.23Scts (-23% yoy), which we consider to be slightly above expectations.
The positive variance sprang from lower-than-expected financial expenses.
We see 3Q16 as proof of green shoots of a turnaround.
Qoq, retail NPI improved by 22% with the opening of Michael Kors (MK) in the quarter.
Yoy, hotel NPI improved by 5% thanks to inorganic contribution of Crowne Plaza Extension (CPEX).

NPI for Mandarin Orchard Singapore (MOS) in 3Q16 decreased 3.3% yoy as the hotel recorded a 7.8% yoy decline in RevPAR (partially mitigated by increase in F&B sales).
ADR was relatively stable at the S$250-level but occupancy fell yoy from the mid-90s to c.90%. Although Oct was reportedly a bad month for the hospitality industry, we do not foresee that derailing our forecasts. Already, we are incorporating a RevPAR of S$220 for MOS for FY16F (FY15: S$230, -4.5% yoy).

With the enlarged room inventory coming online from Aug, NPI for Crowne Plaza Changi Airport (CPCA) expanded 50% yoy. Note that the master lease income for the enlarged CPCA included an income support of S$1m (within expectations). This is because the master lease income was less than the pro-rated target quarterly rent of S$4.8m (CPEX has just begun operations).
Essentially, the income support (maximum aggregate of S$7.5m to be drawn down over three years) secures our FY16 and FY17 forecasts.

Retail NPI grew 22% qoq as average occupancy improved 10% pts qoq to 89% (MK opened in the quarter) The negative was rental reversion of -34%, though we note that the reversion was only for 3.9% of Mandarin Gallery’s (MG) NLA.
In addition, the new leases were for the third floor of the mall, a relatively more difficult location to attract tenants. Also, the leases had a higher turnover rent component.

Ultimately, we see the playing out of a material improvement in retail occupancy – opening of MK in 3Q16 and Victoria’s Secret in 4Q16 – plus inorganic contribution from CPEX (secured by income support) through FY17F. These growth drivers would more than offset the bottoming out of MOS’ RevPAR in FY17F and negative rental reversions at MG.
We increase our FY16-18F DPU by 1.6-2.5% on lower finance costs, which raises our DDM-TP (S$0.77). Reiterate Add.
Downside risks could include weaker MOS.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2016-11-01

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.77 Up 0.750