CDL H-Trust – JPM

Looking beyond 2010

• Reiterate Overweight rating and Dec-10 DDM based price target at S$2.10/unit. CDREIT has underperformed FTSE STI and S-REITs Index by 8.5% and 7.5% in the last month. The stock is currently trading at 5.8%/6.7% FY10E/FY11E dividend yield and 1.0x FY10E forecast book, a level that is attractive in our view. Our recent meeting with management has also assured us that hotels under its portfolio, Singapore hotels in particular, are benefiting from increasing global travel and visitor arrivals. The upcoming 2Q results to be announced in July and the wholesale contract renegotiation also in July would be the two near-term catalysts in our view.

• Beginning of the rate recovery cycle. Occupancy for Singapore hotels remained at 85% despite an 11% jump in room rates and the increase in supply in April, indicating strength in the sector thanks to strong visitor arrivals, amounting to 3.6million Jan to Apr. Management indicated that it will continue to push up room rates given stable occupancy seen for its Singapore hotels at above 80% level. Given relatively little supply to come onstream in 2011, we see potential upside risks to our 2011 DPU estimates. Every 10% increase in Singapore hotel’s RevPar would increase our estimates by 11%.

• Accretive acquisitions are on the cards. Singapore and Japan would likely be the trust’s main target markets given the deal flow and the pricing. We see likely accretion of 2-4% to 2011E distributable income assuming a S$300million acquisition. The trust’s sponsor M&C currently owns Studio M Hotel in Singapore.

• Key investment risks: 100% of the trust’s debt is currently floating, any potential increase in interest rates would adversely impact CDREIT’s DPU. Gearing for the trust is currently at 30.7%. Potential acquisitions would likely require financing from equity fundraising in our view.