CDL H-Trust – Phillip

Economic slowdown has been priced in

• 3Q11 revenue $36.4m, NPI $34.0m, distributable income $26.6m

• 3Q11 DPU of 2.77 cents

• Trim FY12/13 DPU by 1.6-2.5% and raise cost of equity to 10%

• Cut target price to S$1.470 but maintain Hold

3Q FY11 results

Gross revenue of $36.4m and net property income (NPI) of $34.0m was registered in 3Q11, a double-digit growth of 15.2% y-y and 12.7% y-y from the corresponding period last year. Distributable income (with a reduction of retained earnings for working capital) was up 9.9% y-y to $26.6m. This presented a DPU of 2.77 cents for 3Q11, bringing 9M11 dividend payout to 8.11 cents. This constitutes 72% of our FY11 estimates. Excluding Studio M Hotel, average occupancy rate (AOR) for Singapore Hotel fell by 2.1%-pts to 89.5% in 3Q11 compared to the year before. Average daily rate (ADR), a laggard relative to AOR, turned in $236 (+8.8% y-y), and boosted the revenue per available room (RevPAR) to $211. This was the highest RevPAR recorded since last high of $222 in 2Q08, prior to the global financial crisis. On the retail front, Orchard Hotel Shopping Arcade posted 97.4% in occupancy with an average monthly rental rate of $7.20 per sq ft. CDL HT's overseas Hotels in New Zealand and Australia saw NPI rose in the region of 4.0-7.9% and contributed 19.8% to the total NPI in the reporting quarter.

Moderating the prospect of Singapore hospitality sector

In view of the turbulences in the western countries, we examine two possible scenarios – 1) base-case (global economic slowdown) and 2) pessimistic (double-dip recession) – that might occur in 2012. In our base-case scenario, we expect tourist arrivals for 2012/2013 to grow at a slower compound rate of 2%/6% respectively as opposed to Singapore Tourism Board (STB)'s CAGR of 7.9% based on the forecasts of 17 million visitors by 2015. With steady pipeline of 3,274 and 2,536 rooms to be added to the hotel inventory over the next two years, occupancy is expected to drop to 83% in 2012/13. RevPAR for CDLHT is likely to slip to lower region of $190. In our pessimistic scenario, we expect annual tourist arrivals to fall 8% in 2012 and recover 10% in 2013. Occupancy is expected to take a plunge to 75%/78% and translate to lower RevPAR of $146/$156 in 2012/13.

Valuation

Given our base-case scenario, we trim our FY12/13 DPU by 1.6-2.5% in consideration of milder growth in tourist inflows. To account for increased macro-economic risk, we raise our cost of equity to 10% and slash our target price to $1.47. We will continue to monitor the market condition and reserve our recession target price of $0.92 in the event of further deterioration in global economies. Based on previous closing price of $1.52, we maintain our Hold recommendation.