CDL Hospitality Trusts - UOB Kay Hian 2019-05-02: 1Q19 Results Slightly Below

CDL HOSPITALITY TRUSTS (SGX:J85)

CDL Hospitality Trusts - 1Q19 Results Slightly Below

CDL HOSPITALITY TRUSTS (SGX:J85)’s Singapore portfolio was dragged by upgrading works and a competitive environment. Management continues to see healthy demand-supply dynamics in Singapore hospitality. Maintain BUY with raised target of S$1.99. Maintain OVERWEIGHT on REITs.

Both CDL HOSPITALITY TRUSTS (SGX:J85)'s 1Q19 gross revenue and NPI saw declines of 10.6% and 10.7% y-o-y respectively, due to reduced contribution from its Singapore, New Zealand, Australia, and UK hotels, as well as full closure of Dhevanafushi Maldives Luxury Resort since June last year for rebranding works. These were partially mitigated by inorganic contribution from Italy hotel (acquired in Nov 18) and higher contribution from Pullman Hotel Munich and Japan Hotels.
CDL Hospitality Trusts' 1Q19 DPU declined 3.7% y-o-y to 2.09 S cents, forming 22.1% of our full-year estimates.

Orchard Hotel saw 8.6% of its room inventory closed for renovation of guest rooms in Orchard Wing, and its F&B revenue was affected (full closure of Grand Ballroom and all meeting facilities for upgrading works).
M Hotel and Copthorne King’s Hotel also saw inventory taken out due to pipe works. The refurbishment projects in progress are expected to give CDL Hospitality Trusts's portfolio a competitive advantage in the coming years. Excluding these out-of-order rooms inventory, RevPAR actually increased 0.4% y-o-y.
Singapore hospitality market was also affected by the absence of major events such as the Singapore Airshow and ASEAN Ministerial meeting that helped to boost tourist arrivals in the previous year.

Supply growth moving forward is expected to be marginal, with island-wide hotel inventory estimated to increase to only 1,900 net rooms in 2019 (421 in the city centre). Singapore hotel room inventory is expected to expand at 1.3% CAGR between end-18 to end-22 (vs CAGR of 5.5% from 2014-17).
Management highlighted several demand drivers, such as Singapore’s future MICE pipeline, and has secured events in the professional services, technology, and F&B industries up to 2022 (a number of which are inaugural editions), which will boost demand for additional hotel room nights and higher spending propensity of the MICE segment. There are also new large-scale tourism projects planned across the island (Jurong Lake District, Greater Southern Waterfront, MBS fourth tower, Jewel Changi, RWS expansion, Orchard road revamp), as well as the opening of Changi T5 (double current capacity to 150m passengers p.a.).
According to STB, visitor arrivals may reach another new record growing by 1-4% in 2019. For 2M19, visitor arrivals grew by 2.0% y-o-y.

The Australia portfolio saw lower rentals mainly due to the weakened AUD currency. New Zealand RevPAR declined 4.8% y-o-y due to new competitor supply which led to a softer marker in Auckland. UK RevPAR declined by 4.2% y-o-y due to the uncertainty surrounding Brexit as well as the weaker GBP.
New market entrants in Cambridge have also increased competition, and affected performance of Hilton Cambridge City Centre.

Japanese portfolio saw RevPAR grow 9% y-o-y, as the regulatory crackdown on Airbnb listings have curbed supply increases and resulted in better performance for CDL Hospitality Trusts's Japanese portfolio. Tourist arrivals to Japan also continued their upward trajectory with 8.7% y-o-y increase in 2018 and 5.7% y-o-y increase during Jan-Mar 19. This is likely to continue given that the country is slated to host major sporting events such as the 2019 Rugby World Cup and Tokyo 2020 Olympics.

Gearing increased marginally to 35.2% in 1Q19 (+1.0ppt q-o-q), with ample debt headroom estimated at S$521m. 1Q19 borrowing costs remained stable at 2.4% (flat q-o-q).

We introduce our forecasts for 2021, and fine-tune our 2019-20 DPU forecasts by -1 to -5%, factoring in new assumptions on revenue mix and gross operating profit margins.

Maintain BUY with a raised target price of S$1.99 (previously S$1.83), factoring in a lower discount rate on more positive demand-supply outlook for Singapore hotels. Our valuation is based on DDM (required return: 6.8% and terminal growth of 2.0%).

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-05-02

SGX Stock Analyst Report BUY MAINTAIN BUY 1.99 UP 1.830