OUE Hospitality Trust - RHB Invest 2017-05-15: Key Notes From Investor Luncheon

OUE Hospitality Trust - RHB Invest 2017-05-15: Key Notes From Investor Luncheon OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - Key Notes From Investor Luncheon

  • We recently hosted the management of OUE Hospitality Trust (OUEHT) for a luncheon meeting with investors. 
  • Key discussion points were the performance of CPCA hotel and the impact from opening of a new terminal, competition in the hotel sector and REVPAR outlook, and strategies for MG amidst a soft retail market. 
  • Management shared our view that 2018 is expected to be a turnaround year for the hotel sector with several catalysts suggesting a rebound. While the retail outlook remains challenging, recent long leases signed by key new retail tenants and a limited supply on Orchard Road act as mitigating factors. 
  • Maintain BUY with a higher TP of SGD0.78 (from SGD0.76).

Three key catalysts for the hospitality sector turnaround in 2018: 

  1. Opening of Changi Airport Terminal 4 by 2H17F which could boost passenger handling capacity by c.24%, 
  2. An even year, 2018 will have more calendar events boosting corporate demand, and 
  3. Limited supply pipeline. While near-term outlook remains challenging with RevPAR expected to decline c.3% in 2017, we expect a mid-single digit increase in 2018F RevPAR on the back of above catalysts.

Crowne Plaza Changi Airport (CPCA) the key growth driver ahead. 

  • The occupancy at Crowne Plaza Changi Airport (CPCA) Hotel (563 rooms) has picked up to mid-70% in 1Q17 from c.60% in Aug 2016. Average Daily Rates (ADR) however remain 10-20% below peak levels. 
  • Management noted that its near-term focus would be to bring the occupancy back to mid-80’s by mainly targeting corporate demand. Since CPCA is the only hotel on the airport premises, demand is expected to see a good improvement with the opening of Changi Terminal 4 in 2H17F.

Fully refurbished Mandarin Orchard Singapore (MOS) well positioned for rebound. 

  • The asset enhancement programme to renovate 430 rooms and increase meeting facilities at Mandarin Orchard Singapore (MOS) has been fully completed in Mar 2017. The capex was fully funded by sponsor OUE Limited as part of the IPO agreement. 
  • Although overall RevPAR declined 2.3% YoY in 1Q17, occupancy remained high (c.89%). We believe with the recent refurbishments, MOS offers good potential for a RevPAR increase as sentiment improves in 2018.

Mandarin Gallery (MG) tenant sales improved in 1Q17. 

  • Despite a tough retail market, tenant sales on same-store basis improved (c.1-2%) in 1Q17. Management noted that it has signed long-leases of 7-10 years with its new tenants Michael Kors (3Q16) and Victoria’s Secret (4Q16) which should lend stability. 
  • Mall curation will be key effort ahead with focus on big brands that have their own clientele. About 12% of malls’ NLA is pending renewal in 2017 for which we expect negative a rent reversion of 10-15%.

Maintain BUY with a higher TP of SGD0.78 (previously SGD 0.76). 

  • We have tweaked higher our FY18-19 DPU forecasts by 1-2% factoring in a higher RevPAR and adjusted our TP accordingly. 
  • Our DDM based TP is derived from a COE: 7.8% and TG: 2%. 
  • Valuations remain attractive with stock offering a FY17-18F yield of 7.1% and 7.3% respectively

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-05-15
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.780 Up 0.760