OUE Hospitality Trust - RHB Invest 2017-08-02: In A Good Position For A Rebound

OUE Hospitality Trust - RHB Invest 2017-08-02: In A Good Position For A Rebound OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - In A Good Position For A Rebound

  • OUEHT's 2Q results were in line. The hotel segment turned in a strong performance with a turnaround in RevPAR (MOS +5%YoY), backed by demand pick-up. 
  • We expect better performance ahead, driven by a double boost from the opening of Changi’s T4 and gradual tapering of hotel supply. 
  • Retail segment occupancy improved, with new tenants moving in. Shopper traffic and tenant sales also saw a slight improvement. 
  • We expect OUEHT to benefit from the expected turnaround in the hospitality segment. Maintain BUY with a higher TP of SGD0.83 (from SGD 0.78, 9% upside).

Better-than-expected performance from Mandarin Orchard Singapore (MOS). 

  • Revenue per available room (RevPAR) increased 5% YoY, boosted by both increase in occupancy (~3-4ppts) and higher rates (+1-2%). 
  • The increase in demand was driven mainly by leisure travellers (transient demand), especially from Japan and India. 
  • Corporate demand, though stabilised, still remains weak. 
  • The food & beverage (F&B) segment also performed better, ~+10% YoY. 
  • Management intends to maintain its strategy of holding up the rates and expects a stronger 2018.

CPCA occupancy stabilising. 

  • Crowne Plaza Changi Airport (CPCA) occupancy came in at mid-70% (flat QoQ), while room rates were slightly lower than 1Q. 
  • With 2Q being the seasonally weaker quarter, management expects occupancy to improve in the coming quarters and targets to achieve 80% levels. We believe that with the opening of Changi Airport Terminal 4 (T4) in 3Q17F and lack of new supply in the area, the higher occupancy and room rates would be easily achievable. 
  • Notably, CPCA’s RevPAR has come down by 20-30% from its peak, thus offering more scope for a rebound.

Retail – decent performance despite challenges. 

  • Net property income (NPI) from the retail segment increased 20% YoY. The key reason was the healthy increase in occupancy at Mandarin Gallery of 93.9% YoY (+14.8ppts YoY) as new tenants moved in. 
  • More importantly, tenant sales (same store) and shopper traffic also saw slight improvement. The mall’s effective achieved rents were SGD23.80 psf/month (-3% YoY). About 9% and 22% of leases are due for renewal in FY17F-18F – we expect negative rent reversions of ~10%.

Three key catalysts for hospitality sector turnaround in 2018. 

  • Key factors favouring a rebound in 2018F are: the opening of T4 by 3Q17, which would boost passenger handling capacity by ~24%; 2018 being an even year, which would mean more calendar events boosting corporate demand; and lastly, a limited supply pipeline. 
  • While the near-term outlook remains challenging, with RevPAR expected to decline ~2-3% in 2017, we expect a mid single-digit increase in 2018F RevPAR on the back of the above catalysts.

Maintain BUY on OUE Hospitality Trust (OUEHT) with a higher Target Price of SGD0.83. 

  • We have tweaked our DDM model by lowering our CoE assumptions by 50bps to 7.3% by reducing our risk free rate assumptions. Our TG remains unchanged at 2%. 
  • Valuations remain attractive, with the stock offering FY17F- 18F yields of 6.7% and 6.9% respectively
  • Key risks to our assumptions are the lower-than-expected pick-up in visitor arrivals and strong SGD.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-08-02
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.83 Up 0.780