CDL Hospitality Trusts - RHB Invest 2020-08-25: Awaiting Vaccine Shot; Upgrade To BUY


CDL Hospitality Trusts - Awaiting Vaccine Shot; Upgrade To BUY

  • Hospitality has been the industry hardest hit by the COVID-19 pandemic, but we expect visitor arrivals to rebound sharply when a vaccine is found. With the development of six vaccines being in advanced stages (more details here), and the gradual easing of travel restrictions, we believe a rebound in CDL Hospitality Trusts' share price is around the corner.
  • Upgrade to BUY from Neutral, new SGD1.25 Target Price from SGD1.03, 25% upside.
  • CDL Hospitality Trusts is attractively valued at 0.7x FY20 P/BV, and offers a c.7% FY21F yield.

Positive green shoots.

  • From 1 Sep, visitors to Singapore from Brunei and New Zealand (1.2% of total visitors in 2019) can take a COVID-19 test upon arrival, without needing to comply with the mandatory 14-day stay-at-home (SHN) period. Also, the SHN period for visitors from Australia (excluding Victoria state), Macau, Mainland China, Taiwan, Vietnam and Malaysia will be cut to seven days. Singapore is also spending SGD45m on a campaign to promote domestic tourism.
  • While these steps will not likely result in a significant spike in demand, this calibrated easing of measures is an incrementally positive move.
  • Demand for some CDL Hospitality Trusts (SGX:J85) Singapore hotels (63% of FY19 NPI) is also supported by the Government bulk-booking contracts for 3Q20 – as they will be used as dedicated SHN facilities.

Lease structures with fixed rental floor offers downside protection.

  • Lease structures for its Singapore, New Zealand, Germany and Italy hotels have a fixed rental floor, which offers downside protection. Its Australian hotels are largely on fixed rental rates. In total, base rentals account for ~SGD53mpa. While CDL Hospitality Trusts has not received fixed rental payments (for 1H20) from its German and Italian hotel operators (and has made corresponding provisions) due to the challenging environment, we believe there is a likelihood of these being collected.
  • Our current forecasts assume 50-60% occupancy rates for FY20, and a 20-30% y-o-y drop in room rates – which we expect to increase by 70-75% y-o-y in 2021.

Overseas markets: Expect a slow recovery.

  • Among its overseas assets, Grand Millennium Auckland (12% of FY19 NPI) is expected to be impacted in 3Q20, from the recent re-imposition of lockdown measures. CDL Hospitality Trusts has also reopened its UK and Italian hotels, on some easing in domestic and inter-EU travel restrictions. Asset enhancements for its Maldives assets are also nearing completion, with a full opening expected in 4Q20.

Balance sheet in reasonably good shape with strong sponsor backing.

We cut FY20F DPU by 12%

  • We cut FY20F DPU by 12% on slower-than-expected travel measures easing, but raise FY22-23F DPU by 2-4%.
  • Our COE assumption also decreases by 100bps on a prolonged low interest rate environment and the higher probability of a vaccine being found later than expected.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-08-25
SGX Stock Analyst Report BUY UPGRADE NEUTRAL 1.25 UP 1.030