CDL Hospitality Trusts - UOB Kay Hian 2018-01-29: 4Q17 Results Of CDREIT In Line

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CDL HOSPITALITY TRUSTS J85.SI

CDL Hospitality Trusts - 4Q17 Results Of CDREIT In Line

• CDL Hospitality Trusts (CDREIT)’s results were in line with expectations. Its Singapore properties performed moderately well, despite strong materialisation of 4Q17 supply. 
• There is a buoyant outlook for Singapore hotels, on the back of tight supply pipeline and pick-up in corporate demand. We expect more M&As going forward. 
• Maintain BUY with a raised target price of S$1.95 (from S$1.88).

CDL Hospitality Trust (CDREIT SP/BUY/S$1.82/Target: S$1.95)

Results in line with expectations. Maintain BUY with a raised target price of S$1.95 (from S$1.88), based on two-stage DDM (required rate of return: 7.4% and terminal growth rate: 2.5%). 

• The increased target mainly factors a 20bp increase in terminal growth rate to factor in the improved outlook for Singapore. Both 4Q17 gross revenue and NPI saw respective increases of 14.3% and 7.8% y-o-y, due to inorganic contribution from The Lowry Hotel in Manchester, UK, and Pullman Hotel Munich in Germany. 
• The growth was partially offset by softer trading performance from its Japan hotels, Maldives Resorts and Hilton Cambridge City Centre, and lower contributions from its New Zealand Hotel (due to weakened urrency and higher local property tax). 
• FY17 DPU of 9.22 S cents (-4.3%) came in line with expectations, forming 99.3% of our full-year estimates.

Resilient performance by CDLHT Singapore properties, amid strong materialisation of 4Q17 supply. 

• Even with the opening of seven new hotels in 4Q17, CDLHT Singapore properties performed modestly well with RevPAR improving to S$155 (up 1.1% y-o-y). Management explained that some of these new hotels in the luxury space have been disciplined in keeping to their price aspirations instead of engaging in price competition to fill occupancies. 
• Management expects the bump of new supply in 4Q17 to take time to digest, and effects will still be felt in 1H18.

Buoyant outlook for Singapore hotels on tight supply pipeline and pickup in corporate demand. 

• From 2018 onwards, supply growth has become very marginal ( < 2.5% p.a. over the next three years). This is partly due to the URA tightening approval of applications for new hotels, backpackers’ hostels, boarding houses on sites not zoned for hotel use. 
• Additionally, no hotel sites have been introduced in the Government Land Sale (GLS) programme since 2014. 
• Management also opined that the government is unlikely to introduce more new supply, given that a lot of new sites have come on-stream in the last 3-4 years (which is taking time to digest), and due to the scarcity of land and competing uses (residential, office etc.), the government is unlikely to introduce more new supply. 

Robust performance at New Zealand hotel with 4Q17 and FY17 RevPAR increasing by 5.5% and 25.9% y-o-y respectively. 

• The increased demand was due to an increase in flight capacity and strong line-up of sporting events, like the World Masters Games and British and Irish Lions Ruby Tour. Although NPI for 4Q17 declined y-o-y due to weakened currency and higher local property taxes (which the hotel industry has appealed against), full-year NPI grew 46.3%. 

Weaker A$ dragged Australia NPI, which declined slightly by 1.7% y-o-y for 4Q17, as CDLHT receives fixed rent in local currency. 

Mixed outlook in UK operations. 

• Despite softer demand from entertainment groups following the reopening of Manchester Arena in Sep 17, the Lowry Hotel achieved 4Q17 RevPAR growth of 2.7% y-o-y. 
• However, the RevPAR for Hilton Cambridge City Centre declined 8.5%, due to the Cambridge market seeing increased competition arising from new supply (and resulting in lower occupancies). 

Continued pressure on Maldives resorts. 

• Despite visitor arrivals increasing 8.0% y-o-y for 2017 (and more flights over the peak season), demand growth was outstripped by increases in new supply, resulting in a competitive trading environment. 
• Overall performance was largely affected by the transition of the previous Jumeirah Dhevanafushi into a temporary brand (Dhevanafushi Maldives Luxury Resort) which commenced on 1 Sep 17. 
• Its Maldives resorts recorded a y-o-y collective RevPAR decline of 13.2% in 4Q17 and 14.7% for FY17. 

Gearing may be lowered further to 30%, due to the use of proceeds from the divestment of Mercure Brisbane and Ibis Brisbane. 

• 4Q17 gearing stood at 32.6%, with debt headroom of S$644m. 4Q17 borrowing costs also lowered to 2.1% (vs 1.8% in 3Q17) 

Appetite for more acquisitions going forward. 

• With a strengthened balance sheet (proceeds from sale of Brisbane assets and equity fund raising in 2017), CDLHT has a lot of headroom for further expansion. Debt headroom stood at S$644m. 
• Management guided that they have been eyeing acquisitions in continental Europe. The heavy quantitative easing has led to more attractive borrowing rates, and CDLHT can take advantage of current low rates (before European rates start picking up). 
• Management has also expressed interest in hotel properties in Sydney and Melbourne, which are good for positioning in the long term. 

Vikrant Pandey UOB Kay Hian | Peihao Loke UOB Kay Hian | http://research.uobkayhian.com/ 2018-01-29

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.95 Up 1.880