OUE Hospitality Trust - DBS Research 2018-01-31: Still On An Upswing

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OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - Still On An Upswing

• 4Q17 DPU of 1.27 Scts (-6.6% y-o-y) in line with expectations.
• Results impacted by the absence of income support but RevPAR for Mandarin Orchard up 2% y-o-y.
• Management focused on driving room rates in 2018 with early success in January 2018.

Rally not over. We reiterate our BUY call with a revised Target Price of S$0.93. 

• OUE Hospitality Trust’s (OUEHT) share price has rallied by over 30% since early 2017 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 the recovery in the Singapore hospitality market in 2018 gains momentum and revenue per available room (RevPAR) at its key asset Mandarin Orchard Singapore is still depressed at S$225 versus during peak period at over S$250. This should drive OUEHT’s share price higher. 
• OUEHT is attractively valued, trading at a relatively high forward yield of 5.8%, and compares favourably to some REITS whose yields have compressed to the mid-to-low 5%.

Where we differ – P/B can expand further. 

• While consensus has caught up to our view that OUEHT should trade at a premium to book with consensus’ Target Price implying a P/B of 1.1x, we believe with a multi-year recovery in the Singapore hospitality market, OUEHT should trade at a higher 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, OUEHT remains attractive at c.1.16x P/B and can trade up to1.25x P/B implied by our TP.

Upside from acquisitions. 

• With OUEHT’s distribution yield compressing over the past year from levels which we believe were unjustifiably too high in the first place, OUEHT is now in a strong position to pursue DPU accretive acquisitions. 
• Beyond its Sponsor’s OUE Downtown serviced apartments, we understand OUEHT is also seeking opportunities in Europe and Japan. We have not incorporated any acquisitions in our DPU estimates.

Valuation

• On the back of higher earnings estimates, we raised our DCF-based Target Price to S$0.93 from S$0.90.

Key Risks to Our View

• The key risk to our view is a weaker-than-expected outlook for the Singapore hospitality and retail market.

WHAT’S NEW - Transition quarter

4Q17 DPU falls 6.6% y-o-y

• As expected, 4Q17 was a transition quarter as it heads towards 2018 where we expect the trust to benefit from a recovery in the recovery in the Singapore hospitality market. 4Q17 DPU fell 6.6% y- o-y to 1.36 Scts as there was an absence of income support for Crowne Plaza Changi Airport (CPCA). The income support had been fully drawn down in 3Q17. 
• Excluding the income support from the prior year, 4Q17 DPU would have been flat y-o-y. Nevertheless, OUEHT had a good year with FY17 DPU coming in at 5.14 Scts (+11.5% y-o-y), in line with our estimate of 5.14 Scts. 
• On a full year basis, OUEHT benefited from a full year’s contribution from the Michael Kors and Victoria’s Secret stores, and a 6.1% y-o-y increase in revenue for available room (RevPAR) for Mandarin Orchard Singapore (MOS).

Strong RevPAR performance

• OUEHT’s hotel portfolio had a good quarter with 4Q17 revenue and NPI up 2.9% and 3.6% y-o-y respectively.
• This was underpinned by 2.3% y-o-y increase in RevPAR for MOS to S$225. While occupancy fell from the high 80’s to mid-80’s, the improvement was mainly driven by higher average daily room rates (ADR) as the hotel focused on maximising its yield.
• CPCA also had a strong quarter with 4Q17 RevPAR jumping 32.3% y-o-y to S$176 as occupancy recovered from low 60’s to the mid 60’s. Nevertheless, due to RevPAR only being at S$176, OUEHT only received the minimum rental of S$5.6m.
• Heading into 2018, OUEHT’s strategy will continue to focus on lifting room rates. For the month of January, we understand it has been successful in its strategy. 
• Consistent with commentary from CDL Hospitality Trust, OUEHT’s management also guided that there is potential for RevPAR for Singapore hotels to grow by 2-5% in 2018. In addition, it also highlighted that MOS has historically outperformed the Singapore average.

Earnings still under pressure at Mandarin Gallery but positive signs of a potential turnaround

• Mandarin Gallery continues to be affected by the negative rental reversions in the previous quarters. This resulted in 4Q17 revenue and NPI dropping 1.7% and 15.7% y-oy- respectively. The effective rent per square foot per month now stands at S$22.80 down from S$23.60 in 4Q16.
• However, there are signs of a potential recovery, with occupancy in 4Q17 improving to 96.9% from 96.4% in 3Q17 and 94.1% in 4Q16. In addition, for leases signed in 4Q17, the rental reversion for base rent was about +3.8%. Tenant sales also increased by 4.5% y- o-y
• For 2018, 16% of leases by gross rent are up for renewal and we understand around two-thirds are related to F&B tenants whose leases expire in 4Q18. OUEHT is hopefully of achieving positive rental reversions for these leases.

Marginal uptick in gearing but cost of debt lowered

• OUEHT’s gearing ticked up marginally to 38.8% from 38.1% in 3Q17. However, after refinancing its debt that was due in FY17 and FY18, OUEHT was able to lower the margins on its borrowings. This led to the average cost of debt dropping to 2.5% from 2.8% previously.
• In 4Q17, OUEHT also conducted its annual valuation exercise with the value of its properties being relatively stable. Thus, NAV per unit, remained at S$0.76.

Raising FY18-19F DPU and TP lifted to S$0.93

• With FY17 RevPAR for MOS coming at S$224 versus our estimate of S$221 and incorporating the interest rate savings post OUEHT’s recent financing, partially offset by lower RevPAR assumptions at CPCA (we no longer assume OUEHT receives variable income in 2018 but only the minimum rental of S$5.6m), we raised our FY18-19F DPU by 0.4-1.0%.
• As a consequence of our higher earnings estimates, we also lifted our DCF-based TP to S$0.93 from S$0.90.

Maintain BUY

• With Singapore hospitality expected to stage a multi- year recovery from 2018 on the back of easing new room supply, we believe investor interest in hospitality REITs will continue to drive OUEHT’s share price higher. In addition, we believe the earnings potential for OUEHT has yet to be maximised with RevPAR for MOS at c.S$225 versus in excess of S$250 during peak periods. 
• Thus, with more than 10% total expected return over the coming 12 months we maintain our BUY call with a revised Target Price of S$0.93.

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2018-01-31

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.930 Up 0.900