OUE Hospitality Trust - DBS Research 2017-12-15: Turning Up

OUE Hospitality Trust - DBS Vickers 2017-12-15: Turning Up OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - Turning Up

  • OUEHT's 3Q17 DPU of 1.36 Scts (+10.6% y-o-y) ahead of expectations. 
  • Strong hotel performance with 3Q17 RevPAR at Mandarin Orchard Singapore and the enlarged Crowne Plaza Changi up 8% and 22% y-o-y, respectively. 
  • Headline FY18F DPU to drop marginally from absence of income support but underlying DPU increases by 4%.   



Rally Not Over. 

  • We reiterate our BUY call with a revised TP of S$0.90. 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 forward yield of 6.2%, 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 increase confidence in the holding value of Singaporean hotels, we have raised our DCF-based TP to S$0.90 from S$0.85.


Key Risks to Our View

  • 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 

  • OUE Hospitality Trust’s (OUEHT) 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 by 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 its 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 

  • The 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% 

  • 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 have 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 have lifted our FY17-19F DPU by 2- 8%.


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.


TP lifted to S$0.90 

  • After the 3Q17 results on the back of stronger-than-expected results, we have raised our DCF-based TP to S$0.85 from S$0.80. 
  • However, on reflection with evidence that hotel assets continue to be highly sort after and increased confidence in the expected recovery of the Singapore market given our DBS economists’ expectations of a global synchronised growth in 2018, we have lifted our TP to S$0.90 from S$0.85 by lowering our beta assumptions.


Maintain BUY 

  • We maintain our BUY call with a revised TP of S$0.90, given total 12-month return in excess of 15%.
  • We continue to like OUEHT for its relatively high 6.2% forward 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/ 2017-12-15
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.90 Up 0.850



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