CDL Hospitality Trusts - Maybank Kim Eng 2018-09-14: Room For More

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CDL HOSPITALITY TRUSTS SGX:J85

CDL Hospitality Trusts - Room For More

Set for a turnaround, top sector pick

• We prefer hospitality plays with stronger growth prospects. CDL Hospitality Trusts (CDLHT)’s scale and liquidity makes it a good proxy to a sustained recovery in Singapore’s hospitality sector. Meanwhile, its overseas expansion has gained traction, with a push into Europe continuing to be supported by a positive carry from low funding cost. 
• Low gearing of 33.2% and an estimated SGD600m in debt headroom suggests upside from DPU-accretive deals. 
• We initiate at BUY with our DDM-based SGD1.80 Target Price (COE: 7.4%, LTG: 2.0%), suggesting 24% total return.

Stronger growth in SG in 2H

• CDL Hospitality Trusts (CDLHT)’s Singapore hotels, at 55% of FY18 NPI are well-placed for a rebound in leisure tourism and recovery in corporate demand. 
• RevPAR was flat y-o-y in 2Q18 due to competition from new supply and weak corporate demand during the Trump-Kim Summit and public holiday timings. CDL Hospitality Trusts’ business-focused portfolio is positioned for a stronger 2H 2018, with a 7.6% y-o-y year–to-Jun arrival growth tracking ahead of projections and a stronger MICE event calendar with a boost from major trade shows this year. 
• The tapering of supply should support upside from yield management efforts.

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Overseas expansion DPU driver and gaining traction

• CDL Hospitality Trusts (CDLHT) was amongst the first S-REITs to expand globally - to New Zealand (in 2006) and Australia (2010), and has executed reasonably well on its diversification. Returns from overseas acquisitions (as measured by the ROIC-WACC spread) with the exception of its Maldives investments have performed consistently after the GFC. 
• CDLHT has further capitalised on low funding cost in Europe to expand with its recent deals, with returns expected to improve alongside stronger demand-led fundamentals.
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Undemanding at 6.4% yield, 4% DPU CAGR

• CDL Hospitality Trusts (CDLHT)’s DPU yield is currently at its 12-year mean of 6.4% but we expect its spread with the SG 10-year government bond to narrow as RevPAR growth picks up. 
• We see improving occupancies and RevPARs as near- term catalysts. CDLHT’s scale and liquidity will continue to position it as the best proxy to stronger Singapore hospitality sector fundamentals.
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Swing Factors 

Upside 

• Earlier-than-expected pick-up in corporate demand driving improvement in occupancy. 
• Better-than-anticipated RevPAR trends. 
• Accretive acquisitions where cap rates exceed cost of funds, or divestments at low cap rates which unlock asset values. 

Downside 

• Sizeable increases in hotel room supply without commensurate growth in demand. 
• Deterioration in global macro outlook resulting in decline in RevPARs. 
• Significant volatility in foreign exchange rates could impede hedging efforts and impact DPU estimates. 
• Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations. 

See also the SREIT Hospitality Sector Initiation Report : Singapore REITs - Checking In.

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-09-14

SGX Stock Analyst Report BUY Initiate BUY 1.80 Same 1.80