CDL H-Trust – JP Morgan

3Q09 results showing strong recovery

• 3Q09 results better than expected. CDREIT announced 3Q09 results, DPU of S$0.0204/unit, up 8% Q/Q and is 6 % ahead of J.P. Morgan estimates. DPU YTD amounted to S$0.0590/unit, annualizing 5% yield based on Friday’s closing price. Note that the trust currently pays out only 90% of its distributable income and pays dividend on a semi-annual basis. Book value stood at S$1.41/unit with gearing comfortably at 20.2% and interest cover at 10 times.

• Operating statistics showing strong recovery trend. Occupancy rate for the quarter surged to 86.1% versus 75.5% in 2Q09 with average room rate being stable. RevPAR increased 15% to S$154/day in 3Q09, showing strong recovery trend. We note that occupancy rate tends to pick up 2-3 quarters ahead of room rate and we have therefore raised our earnings estimates by 5 – 7% for FY09E – FY11E.

• Earnings risk still on the upside. Visitor arrivals to Singapore has registered its first Y/Y growth in 2009 this September albeit last year’s low base. Given J.P. Morgan’s bullish view on 2 integrated resorts to be opened in 1Q10 and continuous improvement of business travels, we could see potential upside to RevPAR and therefore earnings estimates. In addition, the trust is currently paying out only 90% of its distributable income, a return to 100% payout ratio as fundamental improves could lift our estimates up by another 10%.

• We reiterate our OW rating on CDREIT, and raise our Dec-10 price target to S$1.85/unit, based on our DDM model using 7.7% discount rate and long term growth rate of 2.8%. Key risk to our rating and price target mainly stem from valuation’s high sensitivity to the RevPAR assumptions. We estimate that every 10% change in RevPAR would affect our DPU estimates by 12%. Any events that could adversely affect both corporate and leisure travels such as pandemics influenza would also be one of the key risks.