CDL Hospitality Trust - CIMB Research 2017-07-28: Is The Singapore Hotel Market Bottoming?

CDL HOSPITALITY TRUSTS J85.SI

CDL Hospitality Trust - Is The Singapore Hotel Market Bottoming?

CDREIT's 2Q17 DPU of 2.08 Scts (-3.7% yoy) was below our expectation and consensus as we had under-calculated unitbase, post rights issue. 1H was 44% of our FY17 forecast.
We note that 2Q17 distribution income (+12.6% yoy) formed 25% of our FY17F, which we deem in line. We lower our FY17F DPU as we rectify our unitbase.

2Q17 Singapore RevPAR declined 1.4% yoy, reinforcing views that the Singapore hotel market has bottomed. However, the timing of recovery is uncertain.
Elsewhere, underlying trends remain the same.
Maintain Hold on CDREIT with projected total returns of 3.2%.
Upside/downside risks could come from acquisitions and the pace of recovery of the Singapore market.

In Singapore, CDREIT registered a 1.4% yoy decline in 2Q17 RevPAR (1H17: -1.1% yoy; 1Q17: -0.8% yoy), reinforcing views that the Singapore hotel market has bottomed.
While we concur, we believe that RevPAR could continue to roll along the bottom, and recovery would only take place in 2H18.
Also, we note that the bulk of supply expected in 2Q17 has been deferred to 2H17F, which implies that RevPAR could feel more pressure in 2H17F.

At this juncture, we feel that visibility on the pace of recovery remains low, though we are certain that a cyclical recovery would eventually happen.
One good example of what we mean by low visibility would be CDREIT’s guidance of RevPAR in Apr. The manager shared that RevPAR for the first 24 days of Apr fell by 8.7% yoy. However, things changed rapidly in the last week, resulting in a modest decline in 2Q17 RevPAR.

The positives were New Zealand which recorded a 49% surge in RevPAR (NZD).
UK NPI grew 30% yoy, thanks to the inorganic contribution of The Lowry Hotel, which was acquired on 04 May 2017. RevPAR for Hilton Cambridge City Centre improved 2.8% yoy (GBP). However, it recorded a decline in NPI due to weakened GBP.
Meanwhile, Australia only received fixed rents this year but it has benefited from stronger A$; NPI grew 4% yoy.

Maldives remain the main drag, and the manager shared that the recovery could only occur in 2019, at the earliest. Maldives recorded a 16.3% yoy decline in RevPAR.
Japan continues to be afflicted by the relative strength of the yen, which put pressure on room rates as the Tokyo economy accommodation market is highly price sensitive. Japan registered a 4.2% yoy decline in RevPAR (JPY).

Gearing as at end-2Q17 rose 1.9% pts qoq to 38.7%. Post completion of rights issue in 3Q17F, gearing is expected to decrease to 33-34%.
We also expect borrowing costs to come down as the trust would use proceeds from the rights to pare down higher-yielding debt. In order to take advantage of the window of the low funding environment, we believe that CDREIT could lever up for further acquisitions.
That said, we also detected the cautiousness in the manager’s tone, as he warned that deals could take time to close.

The key positive in 2Q17 was the moderation in the decline in Singapore RevPAR.
With projected total returns of 3.2%, we maintain Hold on CDREIT with an unchanged DDM-based TP (S$1.56).
Upside/downside risks could come from favourable/unfavourable acquisitions and the pace of recovery of the Singapore market.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-07-28

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.560 Same 1.560