CDL Hospitality Trusts - DBS Research 2020-01-31: A Sneeze But Not Catching The Cold

CDL HOSPITALITY TRUSTS (SGX:J85)

CDL Hospitality Trusts - A Sneeze But Not Catching The Cold

CDL Hospitality Trusts's FY19 DPU of 9.02 Scts in line with full-year forecast of 8.88 Scts despite a mixed bag of results overseas.
Raffles Maldives Meradhoo officially opened in September 2019 after rebranding initiative.
Singapore RevPAR growth started the year strong, growing 4.1% y-o-y.

We maintain our BUY call on CDL HOSPITALITY TRUSTS (SGX:J85). See CDL Hospitality Trusts Target Price.
Sentiments amongst hospitality S-REITs remain cautious given the uncertainty of the coronavirus outbreak. We take comfort that
1. CDL Hospitality Trusts has diversified geographical exposure,
2. Chinese tourists within CDL Hospitality Trusts’s Singapore hotels are limited to just 10% of the total, and
3. ample capacity to acquire. Undistributed divestment gains could buffer DPU in the meantime.
Target Price is adjusted to include more conservative assumptions, without pricing in any acquisitions which we think will see light this year. See CDL Hospitality Trusts Target Price.

Overseas markets might see a bottoming out at this point given the widespread forex risks, South Korea-Japan trade spate affecting Japan room demands and RevPAR dips in Maldives as both of CDL Hospitality Trusts’s assets underwent AEI during the quarter.
We expect Japan to perform better due to the Tokyo Olympics and Raffles Maldives Meradhoo to break even by 2022. Germany hotels will also be expecting a turnaround in 2H20, with a robust line-up of events.

We believe the selloff amongst the hospitality S-REITs was a knee-jerk reaction as the corona virus will likely be a short-term phenomenon. We remain comforted that the limited future supply, coupled with Singapore’s hosting of more events in 2020, will lift demand levels once this uncertainty clears, with a potential for RevPAR to grow 3-5% in 2020.

CDL Hospitality Trusts's revenue for 4Q19 rose 3.2% to S$54.0m, bringing full-year revenue to S$196.9m, a 2.4% dip as compared to FY18. See CDL Hospitality Trusts Announcements.
Net property income dropped 1.2% and 3.3% for 4Q19 and FY19 to S$40.0m and S$141.1m respectively.
The dip in revenue and NPI was mainly due to the closure at Raffles Maldives Meradhoo for rebranding works during the year. The asset officially reopened in September 2019.
Employee benefit expenses and increase in staff cost at the same asset also took a toll on bottom-line figures.
DPU posted for the quarter of 2.77 Scts was flat as compared to 4Q18, while full-year DPU of 9.02 Scts constituted a 2.6% decline y-o-y. See CDL Hospitality Trusts Dividend History.
FY19 NPI and DPU made up 95% and 102% of our previous estimates respectively (FY19 NPI: S$148m, FY19 DPU: 8.88 Scts).

Gearing ratio remains healthy at 35.4% with debt headroom of S$526m on a 45% target gearing ratio.
Weighted average cost of debt dipped 10bps to 2.2% q-o-q.
Balance sheet remains robust should CDL Hospitality Trusts pursue acquisition and further AEI opportunities.

Singapore hotels performed well in FY19, with occupancy rising from 86.9% in FY18 to 87.5% in FY19.
RevPAR growth of 1.6% y-o-y to S$162 was further supported by a 0.9% rise in average daily room rates to S$185.
Cyclical upward trend was visible heading into 4Q19 as RevPAR of S$168 and ADR of S$192 were significantly higher than their full-year averages.
The RevPAR uplift was driven by healthy visitor arrivals in FY19, and limited new supply for the period, despite ongoing AEI at Copthorne Kings Hotel since October 2019.
Sentiments turned cautious following the Wuhan coronavirus outbreak, which levied international travel restrictions onto Chinese travellers.
Management communicated that this exposure was limited to just 10% of hotel guests within the Singapore market.
Room cancellations are immaterial at this point, further increase in February is highly likely.

In the first 28 days of January 2020, RevPAR for Singapore hotels rose 4.1% (y-o-y) on the back of strong leisure travel market and corporate demand.
Performance would have been stronger if not for the cancellations that were seen since the Chinese New Year (CNY) period due to the outbreak of the coronavirus.
While the outlook for the Singapore market remains downbeat in the near term, we remain comforted that the limited future supply, coupled with the hosting of more events in 2020, will lift demand levels once this uncertainty clears.
If the economic environment remains stable going forward, there could be a potential 3-5% RevPAR growth in 2020.
Going forward, CDL Hospitality Trusts is planning selective AEIs within the Singapore portfolio (Copthorne Kings hotel) to boost its attractiveness where the newly refurbished project is projected to perform better and capture higher room rates going forward.

RevPAR dip was in the range of 3.7-18.6% for Germany, UK, Japan and Maldives y-o-y in 4Q19.
The decline in RevPAR in Maldives (-18.6% y-o-y) was due to ongoing renovation works at Angsana Velavaru and the rebranding of Raffles Maldives Meradhoo, which officially opened in September 2019.
Angsana Velavaru will continue to undergo AEI works into July 2020, while Raffles Maldives Meradhoo will go through a gestation period for a few years.
Management shared that they are confident that Raffles Maldives Meradhoo will break even in the next 1-2 years.
Japan hotels continue to see a drag from the Japan- South Korea trade spat, with RevPAR declining 14.4% this quarter. South Korean arrivals represented the second largest inbound tourism market in Japan, and declined sharply by 64.7% in 4Q19.
UK and Germany’s RevPAR declined 3.7% and 10.2% y-o-y due to fewer events within the respective precincts, resulting in a lacklustre trading environment.
Italy, New Zealand and Australia posted y-o-y improvements in RevPAR driven by higher average daily room rates, a stronger concert calendar and fixed lease structures respectively.

Australia and New Zealand operations will continue to face challenges with the influx of new hotel supply, and the weaker currencies. The performance of Maldives resorts has been affected by new supply growth, but the government's efforts to boost tourism should see a boost in demand going forward.
Tokyo also faces an increase in new supply, but the upcoming Tokyo Olympics and Paralympics will provide rate maximising opportunities in 2020. RevPAR for hotels in the UK remained flat due to increasing hotel room inventory in the near term, but the selective AEIs should lend support to protect RevPAR.

Derek TAN DBS Group Research | https://www.dbsvickers.com/ 2020-01-31

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