CDL H-Trust – OCBC

RIDING MULTIYEAR HOTEL INDUSTRY GROWTH

•Hotel demand will outstrip supply

•REIT structure, leases & AEI

•Debt headroom for acquisitions

Strong demand growth for 2012-2015

Given that ~80% of CDLHT’s revenues come from Singapore, its key driver will be the performance of the local hotel industry. The hospitality sector is actively supported by the government and the STB has a target of 17m annual visitor arrivals by 2015, up from 13.2m in 2011. We believe that hotel room demand will grow at a CAGR of 6.4%, outstripping overall supply increases (CAGR: 3.8%) for 2012-2015. Specifically, the high-end hotel subsector, which CDLHT is in, will fare better with a room supply CAGR of 3.0% versus 5.6% for budget hotels. As a liquid high-end local hotel play, CDLHT offers a fairly unique way to capitalise on the multiyear growth of the local hotel industry.

REIT structure and dividend policy

CDLHT consists of a REIT and a dormant business trust. The REIT has master leases on its four- and five-star hotels, with minimum rents for all contracts. The Singapore hotel leases grant CDLHT 20-30% of revenue and gross operating profit as rent. The trust has guided that dividend payout ratio will be in the low 90 percentile range this year to help fund upgrades to the chiller/heater systems and ballroom in Novotel Clarke Quay, with a view to enhancing operating margin and asset value. Asset enhancement initiatives for last year consisted of the refurbishment of rooms in Orchard Hotel and Novotel Clarke Quay.

Debt headroom to pursue acquisitions

We are comforted by the high interest coverage of 8.9x for FY11 and the fact that no debt is due this year. With a gross gearing of 25.2%, there is ~S$520m in debt headroom to finance yield-accretive acquisitions. Going by its track record, the management will likely make prudent acquisitions that will serve as price catalysts.

Initiate with a BUY

We initiate with a BUY rating and a S$2.00 fair value estimate based on a Revalued Net Asset Value (RNAV) analysis. CDLHT represents a solid way to capitalise on the continued robust growth in tourism, while its REIT structure provides the comfort of consistent dividends.