CDL H-Trust – Daiwa

Better occupancy, but room rates still soft

What has changed?

• CDL Hospitality Trusts (CDLHT) announced its 3Q09 results on 30 October. Net-property income was 1% below our forecast but distribution-per-unit (DPU) was 12% above our forecast.

Impact

• For its five Singapore hotels, the occupancy rate improved to 86.1% compared with 85.5% a year ago. However, daily revenue-per-available room (revPAR) declined 28% YoY to S$154 because average room rates slipped to S$185 from S$250 a year ago.

• The major positive variance in the results came from significantly lower-thanexpected net-finance costs. However, with its entire debt refinanced as of 31 July, we expect the net-finance cost to increase substantially for 4Q09.

• We have revised up our DPU forecasts by 3.8% for FY09, by 5.5% for FY10, and by 1.65% for FY11. We have revised up our occupancy assumption to 80% (from 77%) for FY09 and to 85% (from 82%) for FY10.

Valuation

• With roughly a 4% increase in our revPAR assumption for FY10 to S$177, we have raised our six-month target price based on our RNG valuation method (a finite-life Gordon Growth Model) to S$1.36 (from S$1.29). The NAV as of 30 September was S$1.41. On our revised forecasts, CDLHT would trade at a forward yield of 5.9%, one of the lowest in the sector.

Catalysts and action

• We maintain our 4 (Underperform) rating for CDHLT. Performance in 3Q09 was largely within our expectations and a strong recovery in Singapore revPAR is far from certain, in our view. We believe any integrated resort-related disappointment would pose a major investment risk for CDLHT investors.