OUE Hospitality Trust - DBS Research 2017-11-02: Turning Up

OUE Hospitality Trust - DBS Vickers 2017-11-02: Turning Up OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - Turning Up

  • Rally not over. We reiterate our BUY call with a revised TP of S$0.85. 
  • OUE Hospitality Trust’s (OUEHT) share price has rallied by over 15% year to date, on the back of a recovery in DPU as we had expected but we believe the rally is not over. Investor interest in OUEHT should continue to increase as we approach a recovery in the Singapore hospitality market in 2018. This should drive OUEHT’s share price higher. 
  • Also, OUEHT is attractively valued, trading at a relatively high yield of 6.3%, and compares favourably to some REITS whose yields have compressed to the mid-to-low 5%.   



Where we differ –


Valuation still attractive. 

  • Consensus’ TP 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 at 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.

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% increase in Mandarin Orchard Singapore’s FY17 RevPAR versus a 3% rise recorded in 9M17, having raised it from a 2% decline previously. 
  • DPU accretive acquisitions would be an additional re-rating catalyst.


Valuation

  • On the back of a better than expected 3Q17 results, we raised our DCF-based TP to S$0.85 from S$0.80.


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.


WHAT’S NEW


Result ahead of expectations; 3Q17 DPU jumps 10.6% y-o-y 

  • 3Q17 DPU increased 10.6% y-o-y to 1.36 Scts. This was ahead of expectations largely due to the full draw down of the remaining S$1.6m worth of income support for Crowne Plaza Changi (CPCA) versus our expectations that OUEHT would smoothen out the draw down till end FY18. In addition, the performance from Mandarin Orchard Singapore (MOS) was better than expected.
  • Excluding the income support, underlying 3Q17 DPU was still strong, up 8% y-o-y to c.1.28 Scts driven mainly growth in contribution from MOS and CPCA with Mandarin Gallery stable.
  • Robust hotel performance OUEHT’s hotel portfolio had a strong quarter with 3Q17 NPI for the segment rising 5.6% y-o-y to S$23m.
  • The robust result was attributed to MOS delivering an 8% y-o-y improvement in revenue per available room (RevPAR) to S$242. The property saw an improvement in transient business which resulted in occupancies rising from higher 80’s to mid 90’s with average daily rate (ADR) also rising. 
  • Meanwhile, on the back of increased awareness of CPCA’s product offering, occupancy jumped to 80% from 60% level in 3Q16 when the extension at CPCA opened. This resulted in RevPAR increasing from S$147 over August and September 2016 to S$180 between August and September 2017.

Improvement in occupancy contributes to stability at Mandarin Gallery 

  • Contribution from Mandarin Gallery was relatively flat, coming in at S$6.5m (+0.8% y-o-y). An improvement in occupancy to 96.4% from 89.0% helped offset the 2.9% y-o-y decline in effective rent per sqft per month (S$22.90 versus S$24.60 in 3Q16). The decline in effective rent was a result of the negative rental reversions recorded in prior quarters.
  • Over the quarter, negative rental reversions continued with base rents for 8.8% of NLA falling 19%.
  • Going forward, we understand that negative rental reversions is likely to continue but potentially at a moderated pace given a large proportion of the upcoming leases are mainly related to the F&B tenants who have been performing relatively better than some of the fashion tenants.
  • Mandarin Gallery has around 5% and 19% of leases by gross rent up for renewal for the remainder of FY17 and FY18.

Stable gearing 

  • OUEHT’s gearing and NAV per stapled security was maintained around the 38% level and S$0.76 respectively.
  • The average of cost of debt was also stable at 2.8% from the prior quarter Raising FY17-19F DPU by 2-8% and TP lifted to S$0.85 On the back of a stronger than expected result, and ability of MOS to sustain a higher occupancy and drive rates in a weak trading environment, we lifted our RevPAR assumptions for the property for FY17- 19F (2-9% growth versus 2% decline in FY17 and 5% growth per annum for FY18-19). Consequently, we lifted our FY17-19F DPU by 2-8% and raised our DCF-based TP to S$0.85 from S$0.80.

5% underlying DPU CAGR over FY17-19 on the back of a recovery in the Singapore hospitality market 

  • While we project a slight 1% y-o-y dip in FY18F DPU, largely due to the absence of c.S$4.8m worth of income support, OUEHT’s DPU profile remains robust on the back of an expected recovery in the Singapore hospitality market as supply pressures ease and we enter a “conference” year which typically attracts a larger pool of higher yielding corporate guests.
  • We expect OUEHT’s underlying DPU to grow at CAGR of 5% over FY17-19F.

Maintain BUY 

  • With a better than expected results and in excess of 10% total return over the coming 12 months we maintain our BUY call with a revised TP of S$0.85.
  • We continue to like OUEHT for its relatively high 6.3% yield, quality portfolio and management, as well as its robust underlying DPU growth profile.




Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2017-11-02
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.85 Up 0.800



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