CDL H-Trust – DMG

Cash call necessary for probable acquisitions

Cash call exercise to beef up balance sheet. CDLHT announced the issue of 84.8m – 87.7m new units at between S$1.71-1.77 per unit to raise gross proceeds of S$150m, subject to an upsize option to raise additional proceeds of up to S$50m. The issue price represents a discount of between 6.3-9.4% to VWAP of S$1.88 and an increase in share capital of about 10%. According to management, the rationale for this private placement is aimed at providing CDLHT greater debt headroom and financial capacity on potential acquisitions. Maintain BUY, DDM-based TP of S$2.30.

Mild DPU dilution of 3.8% with equity placement. Approximately S$116m will be used to repay its SGD portion of the bridging facility (~5% interest cost) which was used to finance the 5 hotels in Australia, and between S$31-80m to repay part of a DBS loan facility. With a cost of equity of ~6%, we estimate the placement to dilute CDLHT’s FY10 DPU by 3.8%. Nevertheless, the cash call will strengthen its balance sheet, bringing its gearing from 30.9% to 22.6%; amongst the lowest compared to other S-REITs. Large cap peers such as AREIT, CCT, CMT and Suntec have gearings of between 30-33%.

Acquisitions within 6-12 months. Management is seeking to undertake another acquisition within the next few months. They have confirmed their interest in Ibis Bencoolen hotel, which has been put up for sale via a private tender. The 538-room hotel could fetch about S$200m at about 6% yield. Based on a gearing target of 30-35%, CDLHT has a debt headroom of between S$200-350m; sufficient to finance an acquisition of such scale.

Maintain BUY; our S-REIT top pick. We reduce of FY10 DPU estimate from 11.6¢ to 11.1¢ but maintain our TP of S$2.30, in view that strategic acquisitions will likely boost longer-term DPU growth potential. We expect Singapore to register its record 1m visitors in July – a banner figure for the media; hence creating significant euphoria within the sector and engendering a further re-rating for CDLHT.