OUE Hospitality Trust - CIMB Research 2017-08-02: MOS To Power Ahead

OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - MOS To Power Ahead

OUEHT's 1H17 DPU of 2.51 Scts (+24% yoy) was above consensus and our expectation at 51% of our full-year forecast (2Q17 was at 25%). We expect a stronger 2H.
The beat sprang from stronger MOS and faster consumption of income support.
The gloss was undoubtedly on MOS, with a 5% yoy increase in RevPAR, marking the first improvement since 2015.

CPCA, however, dimmed results as we now only expect it to achieve the minimum base rent of S$22.5m for FY17F vs. its annual target rent of S$29m-30m.
Nonetheless, we expect MOS to power ahead and partially offset the shortfall in CPCA. Maintain Add with a higher DDM-based TP.

2Q17 DPU of 1.21 Scts grew 32% yoy, thanks to higher hospitality (13% yoy increase in NPI) and retail income (+20%).
Though 1H17 formed 51% of our full-year forecast, we consider the results above, as we estimate that 1H typically accounts for 47-48% of the full year.
The key positive for 2Q17 was Mandarin Orchard Singapore (MOS), which registered a 5% yoy increase in RevPAR.
While the faster consumption of income support for Crowne Plaza Changi Airport (CPCA) dimmed overall results, we believe that going forward, MOS should be able to overpower the shortfall in CPCA.

MOS’s NPI grew 7% yoy due to 5% yoy improvement in RevPAR to S$210 as occupancy improved from low-80s in 2Q16 to mid-80s in 2Q17. There was a c.1% uptick in room rates as the manager maintained its strategy of holding rates.
Higher F&B income also contributed. MOS still benefits from growth in Indonesian visitors, though they have been overshadowed by the Chinese; it also saw more business from Indian corporates.
While there could be a higher supply of rooms in 2H, we believe MOS has bottomed out.

Income support received for CPCA in 2Q17 was S$1.6m (flat qoq), and we believe that the trust would draw down the remaining S$1.6m in 3Q17.
The faster-than-expected drawdown of income support means that there would be a shortfall in FY18-19F, leading to a yoy decline in our FY18F DPU. However, we believe that a stronger MOS would partially offset the shortfall, while positive spillover from the opening of Changi Airport Terminal 4 (T4) in 2H17 would be the swing factor.

We estimate that CPCA would only reach its target annual rent of S$29-30m by FY20.
The variance vs. its target rent lies in lower room rates. While occupancy has ramped up from the 60%-range when the extension first opened in Aug 2016 to the mid-70s in 2Q17, the manager had to make a trade-off with room rates. We believe that the manager would only be able to push up rates when occupancy reaches mid-80s (we project next year).
We estimate that CPCA would only achieve minimum base rent of S$22.5m in FY17F.

Gearing as at 30 Jun 2017 stood at 38.2% (1Q18: 38.1%), with average cost of debt at 2.8%, +30bp qoq. We note that the sponsor’s Oakwood Premier serviced residences at OUE Downtown soft launched last month.
We believe that it could take a year for the asset to stabilise, before the trust starts evaluating its options.

We increase our FY17F DPU by 4.4% to factor in stronger MOS and higher income support drawn down.
We decrease our FY18F DPU by 0.1% as we expect a stronger MOS, some yoy improvement in CPCA and positive spillover from T4 to offset the shortfall in CPCA’s target rent. With this expectation, we maintain Add on OUEHT with a higher DDM TP of S$0.82 as we increase our terminal growth rate to 2% from 1.8%.
Downside risks could come from a weaker hotel performance.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-08-02

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