OUE Hospitality Trust - DBS Research 2017-08-02: Still Has Value

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OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - Still Has Value

• OUE Hospitality Trust’s (OUEHT) 2Q17 DPU up 31.5% y-o-y to 1.21 Scts - above expectations.
• RevPAR for Mandarin Orchard Singapore up 5% y-o-y contrary to expectations for a soft quarter.
• Tailwinds from expected recovery in 2018 to drive rerating.

Rally not over. 

• We reiterate our BUY call with a revised TP of S$0.80. OUE Hospitality Trust’s (OUEHT) share price has rallied by over 10% year to date, on the back of a recovery in DPU as we had expected but there were many who were skeptical on the stock’s outlook. We believe the rally is not over. 
• In our view, investor interest in OUEHT is still in the early stages and as we approach 2018, a recovery in the Singapore hospitality market should drive OUEHT’s share price higher. 
• Also, OUEHT is an attractive value stock that is currently under-the-radar; the stock offers a relatively high yield of 6.4%, which compares favourably to some REITS whose yields have compressed to the mid-to-low 5%.

WHAT’S NEW

Another impressive quarter Jump in 2Q17 DPU

• 2Q17 DPU rose 31.5% y-o-y to 1.21 Scts with 1H17 DPU coming in at 2.51 Scts (+24.3% y-o-y). This was ahead of expectations with 1H17 DPU representing 52% of our original FY17F DPU.
• The stronger than expected earnings was mainly due to a 5% y-o-y increase in 2Q17 revenue per available room (RevPAR) contrary to our expectations of a decline, as well as better than expected occupancy at Mandarin Gallery.
• Overall net property income (NPI) rose 15% y-o-y as OUEHT benefited from the contribution of the Crown Plaza Changi Airport extension (CPEX) which was acquired last year, and similar to 1Q17, benefited from the opening of the Michael Kors and Victoria’s Secret stores, which were undergoing fitting-out and/or rent-free period during 2Q16.

Active management of Mandarin Orchard Singapore comes to the fore.

• NPI for Mandarin Orchard Singapore (MOS) rose 6.8% y-o-y on the back of a 5% y-o-y increase in RevPAR to S$210 despite pricing pressure in the Singapore market. The higher RevPAR was driven by both increases in occupancy and average daily room rate which was impressive considering CDL Hospitality Trust reported a 1.4% decline in 2Q17 RevPAR for its Singapore portfolio.
• In addition, the improvement in NPI was attributed to higher food and beverage revenue on the back of higher patronage of its restaurants and dining venues. Furthermore, banquets sales received a boost from more wedding events and business meetings following the opening of new meeting facilities.

Crown Plaza Changi making good progress but still ramping up

• The enlarged Crown Plaza Changi with its 243-room extension continues to make good progress with occupancy for the property now tracking the mid- 70’s up from 60+% range when the extension was first opened.
• On the back of a higher room count, NPI for the property rose 43% y-o-y to S$4.3m.
• Income for the property was further boosted by S$1.6m worth of income support. Thus far, close to S$6m in income support has been drawn down out of S$7.5m.

Turnaround at Mandarin Gallery continues

• NPI rose 20% y-o-y to S$6.5m as Mandarin Gallery benefited higher effective occupancy of 93.1% versus 79.1% in 2Q16. This was also higher than our 91% occupancy estimate for the whole of FY17.
• However, committed occupancy dipped marginally to 94% from 94.7% in 1Q17.
• Effective rent for the mall ticked up marginally to S$23.80 psf/month from S$23.70 in 1Q17. But, this was still down 3% from S$24.60 achieved in 2Q16.
• Pressure on rents continues with OUEHT reporting a 17% fall in rental reversion of base rents for around 6.3% of NLA.
• We expect rental pressure to continue for 10% of leases (by NLA) that are still up for renewal during the remainder of FY17 and 28% of leases expiring in 2018.

Stable gearing

• OUEHT’s gearing and NAV per stapled security was maintained around the 38% level and S$0.76 respectively.
• However, its average cost of debt increased to 2.8% from 2.5%, partially due to 100% of the trust’s floating debt now being fixed using interest rate swaps.

Raising FY17-18F DPU by 3% and TP lifted to S$0.80

• As a consequence of the stronger RevPAR performance and higher effective occupancies, we lifted our FY17-18F DPU by 3% p.a. For MOS, we now assume a 2% fall in FY17 RevPAR versus 4% previously. In addition, for Mandarin Gallery, occupancy is now estimated to settle at 93.5% versus 91% previously.
• On the back of our higher earnings estimate and rolling forward to FY18, we raised our DCF-based TP to S$0.80 from S$0.76.

DPU growth to moderate in 2H17 but upside risk remains

• OUEHT’s DPU bounced up by 24% in 1H17 and we expect DPU growth to moderate in 2H17 given close to 2,700 new rooms will be added in the market.
• However, there is upside risk to our earnings estimate if OUEHT is able to successfully navigate the near term challenges in the Singapore hospitality market similar to its outperformance in 2Q17, and new hotels act rationally on pricing to protect their brand equity given that a majority of the new supply is in the upscale and luxury category.
• Beyond 2017, we expect OUEHT to benefit from the recovery in the Singapore hospitality market, and also the opening of Terminal 4 at Changi Airport which should result in higher passengers that could lead to higher occupancies at its Crowne Plaza Changi Airport property. 
• However, FY18 DPU is likely to be tempered by the expected drop off of income support received from Crown Plaza Changi Airport.

Maintain BUY

• With the stock offering in excess of 10% total return over the coming 12 months, we maintain our BUY call with a revised TP of S$0.80.
• With the Singapore hospitality market expected to stage a recovery from 2018 onwards due to the easing of supply pressures, we expect increased investor interest in the sector to sustain OUEHT’s share price rally year to date.

Where we differ – Valuation still attractive. 

• Consensus’ TP is close to OUEHT’s current share price and implies a P/B of 1x. While on a headline basis OUEHT appears fairly valued, we believe with a recovery in the Singapore hospitality market, there is potential for OUEHT to trade a premium to book. 
• We look back to the 2010-2011 period where its comparable CDL Hospitality Trust traded up to 1.5x P/B during an upswing in the Singapore hospitality market. Thus, we believe, OUEHT remains attractive even at 1x P/B.

Still on an earnings upgrade cycle. 

• In our view, OUEHT remains on an earnings upgrade cycle which should drive its share price higher. There is still room for OUEHT to beat expectations as we have conservatively assumed a 2% drop in Mandarin Orchard Singapore’s (c.60% of 1H17 net property income) in Average Daily Rate (ADR) versus a 1% increase recorded in 1H17.
• Additional re-rating catalysts for OUEHT would come from DPU accretive acquisitions.

Key Risks to Our View

• Competitive landscape. The key risk to our view is a weaker-than-expected outlook for the Singapore hospitality market. In addition, rents at Mandarin Gallery may fall below expectations if there is a significant deterioration in the Singapore retail scene.

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2017-08-02

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.80 Up 0.760