CDL Hospitality Trusts - RHB Invest 2017-04-27: Nearing Inflection Point

CDL Hospitality Trusts - RHB Invest 2017-04-27: Nearing Inflection Point CDL HOSPITALITY TRUSTS J85.SI

CDL Hospitality Trusts - Nearing Inflection Point

  • We expect a turnaround in Singapore hotel RevPAR in 2018 with supply headwinds fading away. Demand is expected to stay resilient with the opening of the new Changi Airport terminal in 2H17 combined with STB’s marketing efforts. 
  • In the near-term, NZ remains the key growth driver aided by strong market fundamentals and favourable lease structures. 
  • With the worst likely behind it and a turnaround in sight, we expect a potential re-rating of the hospitality sector. 
  • Upgrade to BUY (from Neutral) with a higher TP of SGD1.62 (from SGD1.47, 7% upside).

NZ emerges as the key growth driver. 

  • In 1Q17, NPI from New Zealand (NZ) surged 90.2% YoY. The strong performance was driven by multiple catalysts:
    1. Buoyant hotel demand due to surge in visitor arrivals; 
    2. New master lease-structure that captures upside by higher variable rents; 
    3. Strong brand presence of new hotel operator in NZ; 
    4. Stronger NZD.
  • With the future supply remaining limited in Auckland, we expect the strong growth to continue and act as the key near-term growth driver.

Singapore RevPAR to rebound in 2018. 

  • While CDL Hospitality Trusts (CDLHT) Singapore hotel revenue per available room (RevPAR) is expected to decline by 2% in 2017, we expect RevPAR to rebound by 3% and 5% in 2018/2019 key reason being the tapering off hotel supply. 
  • An estimated 3,767 rooms (5.9% of inventory) is set to open this year with a supply for 2018 being a minimal 69 rooms. 
  • In 1Q17, occupancy for Singapore hotels improved 4.5ppts to 88.4% while room rates declined 5.9%. We expect room rates to stabilise and pick up later this year as competitive pressure eases.

Visitor demand to remain resilient. 

  • YTD Feb’17, Singapore visitor arrivals and visitor days grew by 3.4% and 2.1% YoY respectively. 
  • Looking ahead, the opening of a new terminal in Changi Airport in 2H17 should further boost connectivity and increase frequencies. 
  • We are also positive on Singapore Tourism Board’s (STB) recent efforts to promote Singapore as a tourist destination by tying up with JTB Corp and The Walt Disney Company (South- East Asia) (Disney). STB, Changi Airport Group and Singapore Airlines have also formed a partnership and would jointly invest SGD34m to promote Singapore as a stopover or twinning destination to travellers globally.

Other market updates. 

  • UK hotel performance is expected to remain strong with the weaker GBP propelling strong inbound travel. Maldives’ performance is likely to be impacted by a slowdown in Chinese visitors and stronger USD. Management is currently working with operators to improve the market mix and contain costs. 
  • For Japan hotels, while occupancy remained strong, a stronger JPY and price sensitive travellers resulted in an overall RevPAR decline of 7.2%. 
  • Australia’s performance is likely to stay subdued with new supply and weak demand. However a high proportion of fixed rents mitigates the downside.

Upgrade to BUY with a higher TP of SGD1.62. 

  • We lift our FY18/FY19 DPU assumptions by 4%/8%, factoring in a 3-5% rebound in Singapore hotel RevPAR. 
  • Our DDM-derived TP is based on COE:7.9% and TG:1%. 
  • The stock offers FY17F/FY18F yields of 6.9%/7.3%, which we deem as attractive.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-04-27
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