CDL Hospitality Trusts - DBS Research 2021-02-01: Looking Ahead To Travel Resumption

CDL HOSPITALITY TRUSTS (SGX:J85)

CDL Hospitality Trusts - Looking Ahead To Travel Resumption

CDL Hospitality Trusts's FY20 DPU of 4.95 cents was a pleasant surprise.
Possible extension of government quarantine business in Singapore and New Zealand provides downside protection.
Positioned for a recovery with a global portfolio.
Target price adjusted to S$1.35 on slight tweak in earnings.

CDL Hospitality Trusts (SGX:J85) reported FY20 DPU of 4.95cents, ahead of consensus and our estimates. This was mainly driven by a capital distribution of S$20m (representing ~33% of total distributable income) which came from the partial distribution of proceeds from the sale of Novotel Clarke Quay (NCQ).
Due to the travel restrictions impacting portfolio occupancies and RevPARs, CDL Hospitality Trusts's FY20 gross revenues and net property income fell by 40.3% and 50.9% to S$117.6m and S$69.3m. 2H20 earnings showed a notable improvement compared to 1H20 mainly due to income contribution from W Hotel.
The declines in 2H20 were a tad narrower with revenues and net property income declining by 36.5% and 46.2% respectively, implying a basing out of declines.

CDL Hospitality Trusts reported an asset devaluation of ~ 9%. The decline was driven by valuers re-setting their cashflow assumptions, assuming a 4-year trajectory back towards pre-COVID-19 levels. NAV as a result declined to S$1.32/unit (vs 1.52/unit) a year ago.
CDL Hospitality Trusts's gearing inched higher to 37.5%. While interest coverage ratio appears low at 2.2x, we understand that the REIT has cash reserves of S$131.1m and facilities of S$701.9m (revolving committed facilities of S$301.9m)

Portfolio RevPARs declined in the range of 20%-85% in FY2020 due to enforcement of travel restrictions, which we believe is priced in. While we are starting to see an improvement in performance in RevPARs in 4Q20 as governments initiated domestic staycation campaigns in Japan and Singapore while New Zealand and Maldives enjoyed improved demand from isolation and pent-up leisure travel respectively.
That said, its European (Germany and Italy) and UK hotels saw stiffer domestic travel restrictions due to the second wave in COVID-19 cases. The current second wave seen in the UK and Europe, and lockdowns for the substantial part of 1Q21 implies that portfolio occupancies there are likely to remain low and below optimal levels, at least for 1H21.

CDL Hospitality Trusts’s revenues have been supported by government quarantine business in its key markets of Singapore (4 out of 6 hotels in the portfolio) and New Zealand, where the governments have block booked the hotel rooms for isolation of inbound travellers. While room rates are typically low, the block bookings of these entire hotels have boosted occupancies (to 100%) and cashflows for these hotels are typically at breakeven. This is much welcomed in the current difficult period where alternatives remain limited given the travel border restrictions.
While most of the government quarantine business is expected to taper off from 1Q21 onwards, we believe there is an opportunity for an extension through to the 1H21 (especially for CDL Hospitality Trusts’s hotels in Singapore and New Zealand) as we continue to see imported cases. This will be a positive near-term booster prior to a potential rebound in travel (albeit slow) from 2H21 onwards.

Our FY21F revenues and net property income implies a rebound of close to 50% y-o-y. This improvement hinges on the
1. relaxation of shutdown restrictions in Europe which will boost domestic travel,
2. a gradual re-opening of the borders come 2H21, which will boost international travel markets like Singapore and Maldives, which in a normalised year contribute close to 70% of revenues.
There is opportunity for CDL Hospitality Trusts to capture the potential business travel for the World Economic Forum (WEF) which is expected to be held in Singapore in May 2021. The successful hosting of the event during 25-28 May 2021 will be another feather on Singapore’s cap as a globally recognised MICE and travel destination.

We have adjusted our earnings estimates slightly lower to account for
1. slower than anticipated recovery in Europe (due to current lockdowns), and
2. downside to earnings from Australia as the master lease for its Perth hotels expires in April 2021.

The 3% rise in CDL Hospitality Trusts's share price (29 Jan 2021) despite weak operating results imply that investors are willing to look beyond 2020 and look forward to the potential rebound in RevPARs in 2021 in anticipation of a gradual relaxation in travel restrictions sometime during 2021 as the ongoing vaccination programme gathers pace.
While the 26% rise in CDL Hospitality Trusts's share price since news of Pfizer’s positive efficacy trials back on 2 Nov’2020 appears to have priced in expectations that the hospitality sector is past its worst, we believe that investors can look forward to the next leg of re-rating, driven by earnings in 2H21 when borders gradually re-open.
While P/NAV of 0.9x has factored the recent declines in valuation, placing it within -0.5 SD of its historical mean, we believe that positive macro datapoints will drive CDL Hospitality Trusts higher towards its mean of 1.0x P/NAV.
See CDL Hospitality Trusts Share Price; CDL Hospitality Trusts Target Price; CDL Hospitality Trusts Analyst Reports; CDL Hospitality Trusts Dividend History; CDL Hospitality Trusts Announcements; CDL Hospitality Trusts Latest News.

Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-02-01

SGX Stock Analyst Report BUY MAINTAIN BUY 1.35 DOWN 1.400