CDL Hospitality Trusts - DBS Research 2020-12-01: Trading Below Replacement Costs


CDL Hospitality Trusts - Trading Below Replacement Costs

  • Pent-up demand, especially for leisure, to drive a “V- shaped” recovery for CDL Hospitality Trusts to capture.
  • Portfolio well-positioned to capture demand from domestic demand and Singapore staycations.
  • Refreshed estimates to assume a 4-year normalisation period; upside if demand runs ahead of expectations.
  • Target price of CDL Hospitality Trusts raised to S$1.40, implying total returns of 20%.

Strong rebound in operating metrics projected.

  • While we believe that 2021 brings much promise for the hospitality sector, the growth trajectory will likely differ drastically between markets and hospitality asset types. Given that most governments will likely be more cautious and gradual in their plans to reopen their borders to international tourists post the mass distribution of a vaccine, before that happens, the focus will be on domestic travel markets. Therefore, markets like China, Japan, Europe, US and Australia, which have deeper domestic market demand, will recover first.
  • Destinations with a focus on international travel, like Singapore, while starting to reopen their borders in 4Q20 to selected countries, will most likely see a more lagged pace of recovery.

Domestic markets to lead the rebound.

  • CDL Hospitality Trusts (SGX:J85) is one of the more diversified S-REITs amongst its peers with a strategy to pivot away from Singapore to capture alpha from attractive overseas markets in Europe. We see many opportunities for CDL Hospitality Trusts to tap on the gradual reopening of the global hospitality sector.
  • With CDL Hospitality Trusts deriving 66% of its exposure in Singapore, the re-opening of our borders remain key driver to earnings in 2021. In addition, its exposure in Australia and Europe (collective contribute c.26% of assets) are expected to see a rebound in domestic demand ahead of international travel, while its Maldives hotels should see a pick-up in leisure travel sometime in 2021.
  • While the path back to pre-COVID levels may be a couple of years away, we are optimistic on this forward growth trajectory in distributions (or distributions per unit [DPU]) which should accelerate upon the mass distribution of a vaccine globally. We conservatively assume a 4-year trajectory back to normalcy in our estimates (though front-end-loaded growth) but acknowledge that this timing remains fluid for now and our estimates (dip between 12%-18% in FY21-22F) reflect these updated sector estimates.
  • In our scenario analysis of a 68%/89%/95%/100% catch-up in RevPARs compared to pre-COVID levels in our models, CDL Hospitality Trusts should achieve 70-80% of its pre-COVID-19 DPU by FY22, driven by a mix of organic growth and acquisitions. In a more bullish scenario, CDL Hospitality Trusts may exceed its pre-COVID-19 DPU by FY23.

Attractive valuation buffers.

  • CDL Hospitality Trusts currently trades at a price/book (P/NAV) of 0.8x (close to -1.5 SD levels) and a sharp discount from its mean P/B of 1.0x. We believe that the stock remains on track to ride the travel demand recovery in 2021 and beyond. Our BUY target price is raised to S$1.40 on lower WACC assumptions.

Trading below replacement costs.

  • CDL Hospitality Trusts trades at an implied average price/room of S$0.6m for its Singapore hotels, which is below replacement cost of S$0.75m/room in Singapore. Investors are essentially getting exposure to the hotel sector at below the cost to rebuild.

Positioned for a recovery.

  • The global travel shutdown will impact near-term earnings which is reflected in our refreshed estimates (- 2% to -18% across FY20-22F) but with c.26% of its exposure in Australia and Europe should see uptick in domestic demand in 1H21. With a vaccine distribution and upcoming Tokyo Olympics in 2H21, we see a synchronised recovery across CDL Hospitality Trusts’s portfolio when the travel bug returns.


Where we differ:

Geraldine WONG DBS Group Research | Derek TAN DBS Research | 2020-12-01
SGX Stock Analyst Report BUY MAINTAIN BUY 1.400 UP 1.30