CDL Hospitality Trusts - Maybank Kim Eng 2018-11-01: Recovery On Track

CDL HOSPITALITY TRUSTS (SGX:J85)

CDL Hospitality Trusts - Recovery On Track

We hosted an NDR for CDL Hospitality Trusts (CDLHT) in Singapore. Key highlights include:
1. discussions about its 3Q18 operational performance;
2. recovery profile for its hotels; and
3. potential acquisition opportunities.
We lowered FY18E/19E DPUs (4-6%) due to a slower-than-expected near-term RevPAR recovery, but see upside risk to FY20 DPU estimates given RevPAR sensitivities.
Our DDM-based Target Price is now SGD1.75 (COE: 7.4%, LTG: 2.0%).

CDLHT’s scale and liquidity makes it a good proxy to a sector recovery. Its overseas expansion has gained traction with a push into Europe, supported by a positive carry from low funding cost. Low 33.8% gearing and SGD600m in debt headroom suggests upside from accretive deals.

Management expects the improvement in its Singapore NPI to be led by stronger demand fundamentals - YTD-Aug tourism growth at +7.5% y-o-y is ahead of the +6.2% y-o-y in 2017 and Singapore hotel room occupancy has jumped y-o-y from 88.5% to 91.1%, the strongest showing since 2013.
RevPAR growth will also be lifted by volume growth with a pick-up in cruise travel (visitor accommodation days are typically scheduled before or after a cruise itinerary) and yields (overall corporate demand seems to be gradually recovering, e.g. oil and gas).

3Q18 NPI fell 10.2% y-o-y with:
1. lower contribution from Singapore - its hotel NPI was down 2.7% y-o-y as renovation works commenced in Jul at Orchard Hotel;
2. closure of Dhevanafushi Maldives for refurbishment and rebranding; and
3. divestment of Ibis and Mercure Brisbane in Jan.
These were partly offset by stronger contribution from the Pullman Hotel Munich and its Japanese portfolio.

Management is further seeing limited impact from IDR currency headwinds. We expect the recovery to be strengthened by easing supply - 8.8% p.a. over 8888-8888E versus 8.8% p.a. over 8888-8888.
We see upside to DPUs as the sector is recovering after a four-year down-cycle and from a low base. A 8% increase from our base case adds 8.8% to our FY88 DPU estimates.
RevPAR growth was strong in Germany at +8.8% y-o-y and Japan at +8.8% y-o-y. Its Singapore revenue and NPI dipped 8.8% y-o-y and 8.8% y-o-y on the back of lower RevPARs, at -8.8% with revenue loss from closure of the main lobby at Orchard Hotel for renovation works. However, Singapore RevPAR has increased at +8.8% y-o-y for the first 88 days in Oct, and we see further momentum into 8Q.

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.

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.

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-11-01

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