CDL H-Trust – Phillip

Riding on the up cycle of hospitality sector

•Tapped on its sponsor’s pipeline of properties – Studio M Hotel.

•Stayed on track to compete with newly-completed and upcoming hotels.

•Downplay the upsides in the tourism market.

•Downgrade recommendation to Hold with revised target price of S$2.04.

Studio M hotel acquisition

CDL HT made a comeback to Singapore hospitality property sector by acquiring Studio M Hotel from its sponsor to ride on the tourism wave. The record high visitor arrivals in 2010 and renewed confidence in Singapore tourism market lent support to the acquisition since the subject property just completed in March 2010. Following the acquisition, Singapore room inventory added 360 room counts to 2,711. The S$154.0 million price tag works out to ~S$428,000 per room less the transaction costs. The purchase was fully debt-funded and therefore it is DPU accretive to the unit holders. Post acquisition, the gearing ratio remains at a healthy level of 26.9% and a debt headroom of ~S$400 million for inorganic growth based on 40% total debt-asset leverage ratio.

Asset enhancement at Orchard Hotel and Novotel Clarke Quay

Ongoing upgrading works are scheduled in phases at the Orchard Hotel (OR, 401 rooms) and will continue until 3Q 2011, while the balance of the works at Novotel Clarke Quay (NCQ, 331 rooms) are slated to commence at the year end. In the long run, the short-term loss of rental income from the refurbishment works will be offset by the additional premium commanded on the refurbished rooms. In our opinion, the new facelift will increase competitiveness of CDL HT’s hotels with the new kids on the block.

Downside risks weigh on the potential upsides

Hospitality sector has always been susceptible to dwindling external economies and tourism performance. Downside risks may creep in and overshadow the buoyant tourism market. Possible interest rate hike at the year end, increased foreign worker levies in phases till July 2013 and rising fuel surcharge in aviation sector may dampen the hotel businesses going forward. On the flip side, the lag effect of ADR on higher AOR will be reflected in 2011. Nevertheless, the pipeline supply from 2011 to 2013 will put a cap on the trajectory growth in room rate.

Valuation

Our DDM model has priced in the property tax revision (25% of gross room receipts) from 2011 onwards for Singapore hotel properties, lower RevPAR for OH and NCQ due to refurbishment as well as revenue contribution from Studio M Hotel. We are still positive on the tourism sector for this year but the aforesaid downside risks and pipeline supply coming on stream in the next few years will keep a lid on rental growth. To account for the downside risks, we raise the cost of equity from 6.3 to 7.6% and derive the target price of S$2.04. We believe the current price reflected the fair value of the stock and therefore downgrade our recommendation to hold.