OUE Hospitality Trust - CGS-CIMB Research 2018-07-27: A Near-Term Hiccup In RevPAR

OUE Hospitality Trust - CGS-CIMB Research 2018-07-27: A Near-term Hiccup In Revpar OUE HOSPITALITY TRUST SGX:SK7

OUE Hospitality Trust - A Near-Term Hiccup In RevPAR

  • OUEHT's 2Q/1H18 DPU of 1.17/2.43 Scts was broadly in line with our expectations.
  • Mandarin Orchard Singapore performance affected by lower corporate segment, Crowne Plaza Changi Airport still ramping up.
  • Retail leases continue to be renewed positively.
  • Maintain ADD with a slightly lower Target Price of S$0.89.

2Q18 results summary

  • OUE Hospitality Trust (OUEHT)'s 2Q18 DPU fell by 3.3% y-o-y due to lower revenue from hospitality and retail as well as absence of income support for Crowne Plaza Changi Airport (CPCA) which was fully drawn down by 3Q17. This was partly offset by lower operating expenses and reduced interest expense.
  • 2Q/1H18 DPU of 1.17/2.43 Scts made up 23%/47% of our FY18 forecast, broadly in line with expectations.

MOS RevPAR dragged by lower corporate segment

  • Mandarin Orchard Singapore’s (MOS) RevPAR fell a marginal 0.5% y-o-y to S$209, with a decline in the corporate segment, partly mitigated by higher transient business as well as lower F&B sales. The overall transient business portfolio made up 53% of room revenue in 1H (50% in 1Q), while the wholesale segment accounted for 26% over the same period (24% in 1Q). This made up for the decline in corporate business which accounted for 21% of room revenue (26% in 1Q).
  • Management continues to be upbeat on 2H outlook.

~ SGinvestors.io ~ Where SG investors share

CPCA steadily ramping up

  • CPCA’s RevPAR rose 10.5% y-o-y to S$168 as its operating performance continued to improve y-o-y. Notwithstanding the better operating performance, the master lease income received by CPCA was below the minimum rent of S$5.6m/quarter, or S$22.5m p.a. Hence, CPCA continued to receive minimum rent.
  • With the continued ramp-up of Terminal 4 as well as the opening of the Jewel Changi Airport in 1H19, we are confident that CPCA will earn higher than minimum rent in FY19F.

Retail rental reversions have bottomed

  • Retail revenue decreased by 4.3% y-o-y in 2Q18 due to lower effective rents of S$22.3 psf per month (2Q17: S$23.8). This was a result of negative rental reversions in preceding quarters.
  • SGinvestors.io ~ Where SG investors share
  • Mandarin Gallery’s (MG) average occupancy rate continued to trend up q-o-q to 97.4% in 2Q18 vs. 96% in 1Q18. It achieved positive rental reversion of 5.1% for base rent for leases signed in 2Q18 (for c.4.2% of the NLA).

Capital management

  • Finance expenses decreased 12.1% y-o-y in 2Q, mainly due to lower cost of borrowings of 2.3% following the REIT’s refinancing of its entire debt outstanding in 4Q17.
  • Gearing stood at 38.7%, with 71% of borrowings at fixed rates. The REIT has no refinancing due until Dec 2020.

Maintain ADD

  • We maintain our FY18F-20F DPU forecasts but tweak down our DDM-based Target Price to S$0.89 as we adjust our cost of equity assumption to 8.6% (vs. 8.4% previously). OUEHT is currently trading at 6.2% FY18 yield and offers c.14% total return. Hence, we maintain an Add rating.
  • SGinvestors.io ~ Where SG investors share
  • Re-rating catalysts could come from accretive new acquisitions while downside risks could come from higher-than-expected rate hikes and slower-than-expected recovery in the Singapore hospitality market.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-27
SGX Stock Analyst Report ADD Maintain ADD 0.89 Down 0.920