CDL Hospitality Trusts - RHB Invest 2017-10-30: Singapore Room Rates Are Finally Stabilising

CDL HOSPITALITY TRUSTS J85.SI

CDL Hospitality Trusts - Singapore Room Rates Are Finally Stabilising

SG Hotels saw signs of stabilisation with room rates increasing for the first time in five years. Management noticed some improvement in corporate demand too. Meanwhile, NZ Hotels continued to be the key DPU driver with a stellar 56% YoY NPI increase in 3Q17.
Asset enhancements are planned for its Maldives hotels and Singapore’s Orchard Hotel next year to increase its competitiveness.

CDLHT remains the most liquid proxy to the expected turn-around in the Singapore hospitality sector. While we maintain our BUY recommendation, our TP is currently under review.

CDL Hospitality Trusts (CDLHT)'s 3Q17 adjusted DPU down 3% YoY mainly due to the effect of a rights issue (August) excluding which DPU rose 12.3%vYoY.
Revenue rose 21% YoY while NPI rose 16% YoY on the back of contributions from acquisitions and a stronger performance from its New Zealand hotels (NZ Hotels). The growth was partially offset by the soft trading performance in Maldives, Japan and Hilton Cambridge Centre. Payout ratio was maintained at 90%.
The results adjusting for rights and income from Japan hotels (which would only be available in 4Q) came in line.

During 3Q17, average room rates (ARR) rose a marginal 1% YoY. This is the first YoY increase after 19 consecutive quarters of decline indicating that we are at the tail-end of the room rate decline. Overall RevPAR however was lower 1.4% YoY as occupancy declined 2 ppts.
Management sounded cautiously optimistic that while the environment still remains competitive, hoteliers are now starting to hold up the rates and potentially looking to increase. About 1,532 new rooms (2.4% of inventory) are set to enter in 4Q, which is likely to put some pressure. However, the supply tapers off in 2018 with only 1,139 rooms set to open.
We are forecasting a 3-7% increase in RevPAR for 2018.

Management noted that corporate demand is starting to see some improvement in line with the recent positive economic data. There has also been an increase in enquiries for meetings and events.
The rates paid by corporate clients (~40-50% of total demand) are typically 10-20% higher and a pick-up in corporate demand should boost bottomline.

New Zealand continues to be the bright spot with 3Q RevPAR surging 32% YoY on the back of favourable demand supply dynamics. Management remains confident that NZ Hotels’ performance would continue to remain robust in 2018.
On the flip side, Maldives’ RevPAR declined 25% YoY due to higher competition and weak Chinese demand. RevPAR for its Japan hotels also registered a 2.5% YoY decline due to higher competition in Tokyo’s economy hotel market.

Refurbishment works are being planned for the guest rooms in one wing of Orchard Hotel in mid-Dec 2017 and expected to be completed by Apr 2018. During this period, the hotel is expected to face some disruption with rooms being closed.
Additionally, both of its Maldives hotels would undergo enhancements in 2018 to strengthen its positioning.

CDL Hospitality Trusts (CDLHT) remains one of the liquid proxy to the expected turnaround in Singapore Hotels’ (SG Hotels) RevPAR next year. The signs of improvement in corporate demand should provide further impetus to hotel demand. It is our Preferred Pick among hospitality REITs.
The stock currently offers FY18F-19F yields of 6.4 and 6.7% respectively, which we deem as attractive.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-10-30

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