CDL Hospitality Trusts - DBS Research 2019-07-31: Better Days To Come


CDL Hospitality Trusts - Better Days To Come

  • CDL Hospitality Trusts's 2Q19 DPU of 2.07 Scts (-3.3% y-o-y) slightly below expectations.
  • Barring temporary room inventory displacements, Singapore RevPAR would have increased 1.3%; forward RevPAR growth during 1-28 July up 4.1%.
  • Recent acquisitions and AEI completions to drive sequential growth.
  • Maintain BUY; DCF-based Target Price adjusted to S$1.80.

Attractive proxy to upturn in Singapore hospitality market.

  • We maintain our BUY call on CDL HOSPITALITY TRUSTS (SGX:J85) with a revised Target Price of S$1.80. We believe the projected upturn in the overall Singapore hospitality market, with revenue per available room (RevPAR) to grow by 2-3% p.a. (or up to 5% including overseas properties) over the next few years should drive CDL Hospitality Trusts's share price higher. This, combined with CDL Hospitality Trusts's recent acquisitions, should see DPU rising by over 4% CAGR during FY19F-FY21F.

Where we differ: Asset reconstitution strategy to drive higher P/NAV multiples.

  • We maintain our view that CDL Hospitality Trusts should continue to trade at a premium to NAV. With the portfolio valued at c.S$700,000 per key, which is below asking prices for Singapore hotels in excess of S$1m per key, CDL Hospitality Trusts holds deep value.
  • Given its well positioned properties within Central Singapore, there are opportunities for CDL Hospitality Trusts to reconstitute its portfolio together with its expanded group to drive value for unitholders. We expect these strategies, when executed upon, to drive a re-rating of CDL Hospitality Trusts’s P/NAV multiples over time.

Confidence from a rebound in Singapore RevPAR.

  • In anticipation of a sustained upturn in the Singapore hotel sector over the next 3 years anchored by a lack of new supply, a turnaround in RevPAR would drive investor confidence and generate interest in the stock over time.

WHAT’S NEW - Recent acquisitions and AEI completions should drive sequential growth

2Q19 DPU of 2.07 Scts slightly below

  • CDL Hospitality Trusts's 2Q19 DPU came in at 2.07 Scts, down 3.3% y-o-y. Overall, 1H19 formed c.43% of our FY19F DPU estimate, which was slightly below the historical average weighting of c.45% as CDL Hospitality Trusts’s hotel portfolio typically exhibits a seasonally stronger second half.
  • Despite extensive AEIs at Orchard Hotel, closure of Raffles Maldives Meradhoo for renovation, and lower contributions from New Zealand and Japan, which faced competitive trading conditions, CDL Hospitality Trusts was still able to eke out a slight NPI growth of 0.5% y-o-y to S$33.8m in 2Q19.
  • The lower DPU was mainly due to higher interest expense of S$0.9m as the group took on borrowings for AEIs and the acquisition of Hotel Cerretani Florence.
  • Overall, the core Singapore portfolio (which made up nearly 58% of 2Q NPI) was impacted by the absence of the biennial Food&HotelAsia event and softer overall market demand. Coupled with room displacements from the ongoing room refurbishment at Orchard Hotel and pipe works at M Hotel and Copthorne King’s Hotel, RevPAR dipped by 1.7% y-o-y to S$151, led by a 2.6% y-o-y decline in ADR to S$179.
  • Stripping out the impact of the temporary loss of room inventory in Singapore, RevPAR would have increased by 1.3%.

Overseas performance a mixed bag

  • NPI performance (in SGD terms) of CDL Hospitality Trusts’s overseas properties in New Zealand, Australia, Maldives, and Japan were also lower y-o-y.
  • However, this was more than offset by positive contributions post the acquisition of Hotel Cerretani Florence (which saw RevPAR growth of 5.1% y-o-y) and improved contributions from Pullman Hotel Munich and UK hotels, despite unfavourable forex impact during the quarter
  • Tourist arrivals into New Zealand grew steadily during the year (+1.5% y-o-y YTD-May 2019) but the impact of new supply in Auckland overwhelmed, resulting in a 1.4% y-o-y dip in RevPAR at Grand Millennium Auckland. The weaker NZD and higher labour costs further weighed on NPI, which fell 7.8% y-o-y.
  • Meanwhile the 5.4% y-o-y decline in NPI for the Australia portfolio was mainly driven by AUD weakness.
  • In the UK, sporting events, including Cricket World Cup, drove a rebound in 2Q19 vs 1Q19. NPI for the UK portfolio jumped by c.11% y-o-y, particularly as The Lowry Hotel benefited from a boost in RevPAR. However, RevPAR is likely to return to a normal pattern on the back of new supply in Manchester and Cambridge.
  • A robust events calendar in the first half of 2019 helped RevPAR growth at Pullman Hotel Munich to grow strongly by 9.6% y-o-y, but this should reverse in the second half due to fewer line-up of events.
  • RevPAR for Angsana Velavaru improved by 13.9% y-o-y, supported by underlying growth in tourism arrivals. However, sub-optimal performance for the market is expected to continue during the gestation period post Raffles Maldives Meradhoo’s launch at end-2019.
  • As for Japan, the 1.9% y-o-y decline in RevPAR was mainly due to a softer events calendar in Tokyo and rate competition from hotels in the vicinity. Combined with higher operating costs, NPI dropped by 25.7%.

Maintain BUY, Target Price lowered to S$1.80

  • Near-term earnings are expected to be impacted by AEIs and higher-base effect from a higher number of conferences in 2018. However, with a large proportion of the room renovations for Orchard Hotel already completed in 2Q19 and Raffles Maldives Meradhoo on track for a full launch in 4Q19, we expect a sequential improvement in earnings over the next few quarters.
  • We have lowered our FY19F projections to reflect a weaker 1H19 performance and assumed more conservative occupancy levels and rates for Raffles Maldives Meradhoo during its gestation period.
  • Coupled with a 50-bps cut in our risk-free rate to 2.5%, we derived a lower DCF-based Target Price of $1.80.
  • Maintain BUY.

Carmen TAY DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-07-31
SGX Stock Analyst Report BUY MAINTAIN BUY 1.80 DOWN 1.850