CDL Hospitality Trusts - DBS Research 2019-05-02: Opportunity During Seasonal Lull


CDL Hospitality Trusts - Opportunity During Seasonal Lull

  • CDL HOSPITALITY TRUSTS (SGX:J85)'s 1Q19 DPU down 3.7% y-o-y but in line with seasonal weighting.
  • Short-term drag from AEI at Orchard Hotel but to be boosted once majority of hotel rooms are available in 2H19.
  • Attractively priced with implied value of Singapore portfolio at c.S$650,000 per key, below hotel transactions in excess of S$1m per key.
  • Maintain BUY, Target Price of S$1.85.

What’s New

Lull ahead of sequential improvement

  • CDL HOSPITALITY TRUSTS (SGX:J85)'s 1Q19 DPU came in at 2.09 Scts, down 3.7% y-o-y. While a soft start to the year, 1Q19 represents c.22% of our FY19F DPU which is in line with 1Q seasonal weighting over the past few years.
  • Nevertheless, 1Q19 revenue and NPI were weak down 10.6% and 10.7% y-o-y respectively to S$46.3 and S$33.8m respectively. This was largely due to renovations at Orchard Hotel in Singapore with a 8.6% reduction in room inventory and closure of the Grand Ballroom and meeting facilities. In addition, Raffles Maldives Meradhoo has yet to open which is a drag on earnings.
  • Furthermore, the core Singapore portfolio was impacted by the absence of the biennial airshow and Singapore’s Chairmanship of ASEAN which resulted in additional meetings. Combined with the AEI at Orchard Hotel, RevPAR fell 2.4% y-o-y to S$157, led by a 2.0% y-o-y decline in ADR to S$180 and dip in occupancy to 87.3% (87.6% in 1Q18). Stripping out the AEI works at Orchard Hotel and piping works at Copthorne King and M Hotel which resulted in temporary loss of some room inventory, RevPAR would have increased by 0.4%.
  • Contributions from CDL Hospitality Trusts’ overseas properties in New Zealand, Australia and UK were also lower, partially offset by the acquisition of Hotel Cerretani Florence and improved contribution from Pullman Hotel Munich.

Mix overseas contribution

  • Despite healthy tourist arrivals into New Zealand, on the back of new supply in Auckland, CDL Hospitality Trusts' 1Q19 RevPAR for the New Zealand portfolio fell 4.8% y-o-y translating into a 5.9% y-o-y decrease in 1Q19 NPI to S$5.0m.
  • 1Q19 NPI for the Australian properties fell 11.4% y-o-y owing to the depreciation of the AUD, despite the portfolio largely generating fixed rents under the master lease structure.
  • The UK operations had a soft quarter, with 1Q19 NPI down 10.0% y-o-y, on the back of 4.2% lower RevPAR, weaker GBP and higher wage costs. Hilton Cambridge City Centre was affected by new supply partially offset by relatively stable performance at the Lowry Hotel in Manchester.
  • While the Maldives operations reported a small S$176,000 loss as the new Raffles Maldives Meradhoo has yet to open, pleasingly CDL Hospitality Trusts’s other property Angsana Velavaru reported a 17.6% y-o-y jump in RevPAR as Maldives saw healthy tourist arrivals.
  • For the Japan portfolio, despite RevPAR increasing by 9.0% y-o-y due to a reduction in Airbnb supply, NPI was 3.8% y-o-y lower as CDL Hospitality Trusts faced higher expenses such as cleaning, utilities and marketing costs.
  • Partially offsetting the weakness in the above markets, earnings from Germany improved 21.9%
  • y-o-y as a healthy lineup of events including the biennial trade fair in Munich boosted RevPAR for Pullman Hotel Munich by 23.9% y-o-y.

Marginal increase in gearing

  • Gearing ticked up slightly to 35.2% from 34.2% at end-4Q18 on the modestly higher borrowings. Nevertheless, CDL Hospitality Trusts still has some debt headroom to pursue future acquisitions.
  • On the back of issuance of management fee units, NAV per unit fell to S$1.49 from S$1.53 as at 31 December 2018.
  • Average cost of debt was stable at 2.4% with c.60% of borrowings on fixed-rate debts.

Maintain BUY, Target Price of S$1.85

  • Near-term earnings are expected to be impacted by AEIs and higher-base effect from a large number of conferences in 2018. However, with a large proportion of the room renovations for the Orchard Hotel due to be completed in June 2019 and the ballroom now open as well as Raffles Maldives Meradhoo having a soft opening in 2Q19, we expect a sequential improvement in earnings over the next few quarters.
  • Furthermore, despite quarter-to-quarter RevPAR in Singapore potentially being volatile as seen by a 3.5% decline for the first 25 days in April, with only average 1% per annum growth in new room supply in Singapore over the next four years, we remain confident of a multi-year upturn in the Singapore market.
  • In addition, with the implied value of CDL Hospitality Trusts’s core Singapore portfolio at c.S$650,000 per key, below recent hotel transactions in excess of S$1m per key, we believe CDL Hospitality Trusts remains attractively valued at current levels.
  • Finally, as CDL Hospitality Trusts’s gearing stands at only c.35%, the deployment of its strong balance sheet presents upside risk to our DPU estimates.
  • Thus, we maintain our BUY call with a Target Price of S$1.85.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | 2019-05-02
SGX Stock Analyst Report BUY MAINTAIN BUY 1.850 SAME 1.850