OUE Hospitality Trust - RHB Invest 2017-01-26: 4Q16 Results Flash ~ Not out of the woods

OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - 4Q16 Results Flash ~ Not out of the woods

We make no change to our NEUTRAL rating, forecast and DDM-derived TP of SGD0.70 (CoE: 8.5%, Tg: 2.0%).
The stock offers FY17F dividend yield of 7.3%.

4Q/FY16 DPU declined 20%/30% YoY mainly due to the dilution from rights issue completed in Apr 2016. Overall, the results were in-line accounting for 102% of our full year forecast.
Hospitality segment revenue and NPI rose +2.9%/+1.4% YoY in 4Q16 on the back of higher lease income from enlarged room inventory in Crowne Plaza Changi Airport (CPCA) hotel. Operational performance remains weak with RevPAR from Mandarin Orchard Singapore (MOS), its key hotel asset, declining 6.8% YoY.
On the retail front, average occupancy for Mandarin Gallery (MG) stood at 94.1% (4Q15: 94.8%). New tenant Victoria's Secret opened its doors in Dec'16. For lease renewals, management adopted a change in lease structure with lower base rentals and higher turnover rents in light of weak market. The average rent reversion for base rent was -15% for 4Q16.
Valuation for MOS and MG declined 1% and 7% respectively in-line with weak operational performance. NAV/unit stands at SGD0.77.
Gearing stands at 38.1% with no loan repayment due until July 2018. About 69% of its debt is fixed.

Hospitality segment outlook for 2017 remains negative with supply expected to outstrip demand. Overall, we expect REVPAR to decline by 3-5% this year. Management expects 2H16 to be better than 1H16, with Changi Airport’s Terminal 4 becoming operational, benefitting its CPCA hotel. With competition remaining high management prefers to adopt the strategy of holding occupancies over room rates.
Retail segment outlook remains equally challenging with moderating consumer spending and supply of new retail space.
However, retail supply in Orchard remains limited providing some relief. About 18% of its leases (by gross rent) are due for renewal in 2017 for which we expect negative rent reversions of 5-15%.
Management is exploring acquisition opportunities in key global gateway cities and believes that there exists some interesting opportunities in the US market.

We maintain our NEUTRAL recommendation amidst a challenging hotel and retail market outlook for 2017.
The stock offers FY17F dividend yield of 7.3 % and is trading at 0.9x P/BV.
A potential turnaround could come in 2018 with hotel supply bottoming out.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-01-26

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