OUE Hospitality Trust - RHB Invest 2018-05-03: Better Performance From All Segments

OUE HOSPITALITY TRUST SGX: SK7

OUE Hospitality Trust - Better Performance From All Segments

OUE Hospitality Trust (OUEHT) posted a strong all-round performance, with healthy RevPAR growth for its hotels and a higher occupancy rate at its retail mall. We expect this trend to continue in 2018, with the limited supply of new hotels and continued momentum in visitor demand. Corporate demand is also expected to trend higher, on the back of more MICE events and a positive economic growth outlook.
With borrowing costs inching higher, OUEHT’s refinancing of all its debts at the beginning of the year has proven timely.

Dividend yields are compelling, with FY18F-19F dividend yields at 6.5% and 7% respectively (SREIT averages are 5.8% at 5.9% respectively).
Maintain BUY, with an unchanged Target Price of SGD0.95 (16% upside).

OUE Hospitality Trust’s (OUEHT) retail segment NPI declined 3.1% y-o-y despite the higher occupancy rate, due to a decrease in rental leases signed last year. Its finance expense also dropped 2.3% y-o-y, as borrowing costs decreased.
Despite the higher NPI, DPU declined 3.1% y-o-y, mainly due to the absence of income support – which was fully utilised by 3Q17.
The results are in line with our and consensus estimates, with 1Q18 DPU accounting for 24% of our full-year forecast.

Backed by improving market fundamentals, both its hotels showed a healthy improvement in underlying performance. RevPAR for Mandarin Orchard Singapore (MOS) rose 6.9% y-o-y (3.1% q-o-q), while that of Crowne Plaza Changi Airport (CPCA) grew 9.1% y-o-y (4.5% q-o-q).
We understand the higher RevPAR for MOS was driven predominantly by room rates, and for CPCA, RevPAR growth came mainly from a higher occupancy rate, which it is still ramping up. The REIT’s food & beverage segment also enjoyed higher sales y-o-y.
Overall, we expect its Singapore hotels’ RevPAR to increase by 3-7% y-o-y this year, and believe there could be an upside surprise if visitor demand continues to stay strong.

Mandarin Gallery’s (MG) committed occupancy rate (excluding pop-up stores) rose 0.4ppt q-o-q to 95% in 1Q18. Leases were signed for about 3% of NLA for the mall, and management was able to eke out a positive rent reversion of +2.2% for base rentals – which indicates that efforts to reposition the mall’s tenant mix are starting to bear fruit.
About 13% of leases are due for renewal for the remainder of the year, for which we conservatively expect a flat rental reversion. As there is minimal supply of new malls in the Orchard area, we expect the occupancy to remain healthy at current levels.

A potential acquisition target is the recently-completed Oakwood Premier OUE Singapore (serviced residences), where occupancy is slowly ramping up.
Management is also on the lookout for other suitable hospitality assets across key gateway cities. Funding for acquisitions is likely to be a combination of debt and equity issuance or perpetual securities, as it has limited debt headroom – its net gearing now is at 38.8% (close to management’s comfort level of 40%, and the maximum allowable limit of 45%).
We expect it to evaluate all available funding options, with yield accretion being the key consideration.

Amidst the threat of rising borrowing costs, OUEHT is well-positioned, with the recent refinancing of all its SGD859m of debts. The current average cost of borrowings is 2.4%, with no loans maturing until Dec 2020.

Our Target Price of SGD0.95 is based on a DDM valuation (COE: 7%, TG: 2.0%).
A positive surprise could come from stronger-than- expected visitor arrivals growth (base case: 4-7%).
A key risk is the continued strengthening in SGD and weaker demand from the corporate sector.

Vijay Natarajan RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-03

SGX Stock Analyst Report BUY Maintain BUY 0.950 Same 0.950