OUE Hospitality Trust - RHB Invest 2018-04-04: Recent Selldown Presents Buying Opportunity

OUE Hospitality Trust - RHB Invest 2018-04-04: Recent Selldown Presents Buying Opportunity OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - Recent Selldown Presents Buying Opportunity

  • OUE Hospitality Trust (OUEHT)’s share price has fallen by 7% over the last month, underperforming SREITs’ and STI’s +1% and -2% respectively. 
  • Our channel checks indicate that demand for hotel rooms remains strong, with good response for the Singapore Airshow and growing passenger traffic at Changi Airport. We believe the market’s likely concerns about its sponsor’s issuance of exchangeable bonds is unwarranted, as it would have no material impact on its underlying DPU. 
  • OUEHT remains our Top Pick in the hospitality sector REIT, with unchanged Target Price of SGD0.95 (19% upside).

Hospitality – ground momentum remains strong. 

  • Singapore’s marquee biennial event, the Singapore Airshow (Feb 2018) saw a 10% jump in trade visitors vs 2016. We believe Crowne Plaza Changi Airport (CPCA), being the nearest hotel in the vicinity, would have seen a corresponding positive impact.
  • While latest official visitor arrival data has not been released, Changi Airport’s passenger traffic for 2M18 were up 3.1% y-o-y, implying visitor arrival growth is on track. The recent hefty fines of SGD60,000 imposed on two Airbnb rental hosts will likely deter the growth of online short-term rental services, which should support hotel demand. 
  • With hotel supply having peaked last year, we expect overall RevPAR to increase by 3-7% in 2018.

Potential concerns on recent EB issuance is unwarranted. 

  • In Mar 2018, OUE Hospitality Trust’s (OUEHT) sponsor, OUE Ltd (OUE SP) announced the proposed issuance of exchangeable bonds (EB) due in 2023. The SGD150m EB with 3% coupon pa is exchangeable into OUEHT shares at SGD0.957/unit. 
  • Key to note is that the EB’s will have no dilution impact on OUEHT’s DPU and NAV, and would only result in a potential reduction of the sponsor’s stake to 29% from 37%, if fully exercised. We also highlight that OUEHT’s exchange price is above our target price of SGD0.95.

On the lookout for acquisitions. 

  • Potential acquisition targets include its sponsor’s recently completed Oakwood Premier OUE Singapore (serviced residence), where occupancy is slowly ramping up (currently at 60-70%).
  • Management is also on the lookout for other suitable hospitality assets across key gateway cities. Funding for potential acquisitions is likely to be a combination of debt and equity issuance, given its current gearing of 38.8%, which is close to management’s comfort level of 40% (max limit of 45%). However, we expect management to carefully evaluate all available funding options with yield accretion being the key consideration.

Mandarin Gallery – showing more resilience than expected. 

  • Mandarin Gallery (MG)’s occupancy improved to 96.9% (+0.5ppts q-o-q) in 4Q17. More importantly rent reversions in 4Q17 positively surprised, with rental growth of 3-4%. About 16% of leases (% of rent) are expiring in 2018, for which we expect flat rent growth.

Maintain BUY and Target Price of SGD 0.95. 

  • Post the recent selldown, yields have become more compelling with FY18F-19F dividend yields of 6.7% and 7.2% respectively (vs SREITs’ average of 5.8% and 5.9% respectively). Our Target Price is based on DDM (COE: 7%, TG: 2%). 
  • Positive surprises could from stronger-than-expected visitor arrival growth (base-case 4-7%). 
  • Key risk is continued strengthening in SGD, and weaker-than-expected pick-up in corporate demand.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-04-04
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.950 Same 0.950