CDL Hospitality Trust - CIMB Research 2018-01-02: Bellwether Of The Hospitality Sector

CDL Hospitality Trust - CIMB Research 2018-01-02: Bellwether Of The Hospitality Sector CDL HOSPITALITY TRUSTS J85.SI

CDL Hospitality Trust - Bellwether Of The Hospitality Sector

  • Given that CDL Hospitality Trust (CDREIT) is the bellwether hospitality stock, we believe it should continue to outperform during a cyclical upturn.
  • Despite near-term supply fears, we believe its Singapore hotels could register a yoy improvement in 4QFY17F RevPAR, and 5% growth in FY18F.
  • We see S$200m of acquisitions in FY18F (6% entry yield), lifting FY19F DPU by 5%.
  • We trim our FY18F DPU by 2.8% to factor in weakness from Maldives, but raise our FY19F DPU by 3.6% to reflect Singapore's upturn and its inorganic growth there.
  • Upgrade from Hold to ADD with a higher TP. 
  • Downside risks include slower-than-expected recovery in Singapore market and unfavourable acquisitions.

4Q17F: Singapore could be at an inflection 

  • From a “base-effect” perspective, we believe CDREIT’s quarterly revenue per available room (RevPAR) could be at an inflection – 4Q17F could be its first improvement in quarterly RevPAR in five years. 
  • As we expect occupancy to remain in the high-80%, we project a 5% yoy rise in average room rate (ARR) and corresponding 5% rise in RevPAR for FY18F; we see another 7% growth in FY19F RevPAR. Note that FY19F ARR of S$198 would still be 14% lower than FY12's ARR of S$231, suggesting room for upside.

New Zealand to continue to shine 

  • Grand Millenium Auckland’s RevPAR surged 35% yoy in 9M17, while the change in rental structure to include more variable rent propelled 9M17 NPI by 80% yoy. 
  • We expect the positive performance to continue, given the healthy visitor arrivals and an increase in airline connectivity to the country.

Divestment of Mercure Brisbane and Ibis Brisbane 

  • On 22 Dec 2017, CDREIT proposed the divestment of Mercure Brisbane and Ibis Brisbane for A$77m, representing an exit yield of 5.3% on the fixed rental of the hotels or 10% premium against their latest independent valuations. The divestment is slated to be completed in Jan 2018, and we have factored this into our model. 
  • The proceeds could be used to repay existing debts, while part of it could also be used to top-up the divestment effect in FY18F. It could also be channelled towards capital re-cycling.

The soft spots: Maldives, Japan, UK 

  • We temper our expectations for Maldives, expecting Angsana Velavaru to only earn the minimum rent of US$6m p.a. in FY17-18F. Further, the process to convert Dhevanafushi Maldives to a Raffles resort will lead to sub-optimal contribution until the re-branding exercise is completed in late-2018F. 
  • We also expect lower contributions from Japan given the rising competition in Tokyo’s economy hotel market. 
  • Lastly, we adjust our FX forecast to reflect a weaker GBP though underlying performance in UK has been stable.

Factoring in inorganic growth from FY19F onwards 

  • Given the manager’s desire to take advantage of the current attractive yield spread, and that it has re-calibrated its balance sheet in Jun 2017 with a rights issue, we believe there could be further acquisitions in FY18F. 
  • We estimate that CDREIT has a debt headroom of c.S$400m (assuming 40% cap of gearing). As such, we factor in S$200m worth of acquisitions at 6% entry NPI yield, which would contribute from FY19F onwards, lifting FY19F DPU by 5%. Target markets could include Europe, Japan and Australia.

Upgrade to Add with higher TP of S$1.77 

  • As CDREIT is the bellwether hospitality stock, we believe it would continue to outperform during the cyclical upturn. Hence, the upgrade to ADD. 
  • We reduce our FY18F DPU by 2.8% as we factor in the soft spots (Maldives, Japan and UK) and the divestment of two Australian assets. However, we raise our FY19F DPU by 3.6% on Singapore's hotel upcycle and potential acquisition growth. 
  • Our DDM-based TP also rises on slightly lower COE of 9.2% (previously 9.3%). Our TP implies 6.1% FY19F yield and 1.2x current P/BV.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2018-01-02
CIMB Research SGX Stock Analyst Report ADD Upgrade HOLD 1.77 Up 1.62