OUE H-Trust – CIMB

Post-results feedback

The key issues discussed during the investor luncheon we hosted recently include: 1) higher room rates for renovated rooms, 2) improvement in the Indonesian business at Mandarin Orchard Singapore (MOS) post election, 3) future rental reversion at MG, which is expected to track inflation, and 4) more rooms for inorganic growth. Given further room to grow both organically and inorganically, we have maintained our Add rating with unchanged target price of S$0.96.

What Happened

We recently hosted an investor luncheon for OUE Hospitality Trust following its 3QFY14 results announcement.

What We Think

In 3Q14, MOS posted an average room rate of S$280/night while occupancy was c.90%. During the meeting, it was pointed out that rooms post renovation were able to achieve S$30-40/night more than pre-renovated rooms. F&B was noted to have performed better in 3Q, making up 30% of total revenue (vs. 25-26% for 3Q13). In terms of customer profile, Indonesians, Japanese and Chinese accounted for 30%, 10% and 8% of the hotel’s business, respectively, forming the top three groups of customers at MOS. YTD, it was noted that the Indonesian and Japanese businesses have dipped slightly while business from China grew by c.10% (as a result of securing a large group of Chinese visitors in 1Q14). Having said that, with the completion of the election at Indonesia, business contribution from Indonesians was noted to have picked up.

Mandarin Gallery (MG) similarly performed well during the quarter, with both tenant sales and footfall growing by 5% yoy in 3Q14. Management expects rental reversion at MG to hover at 4-5%, tracking inflation, particularly for street-front (duplex) shops, where the passing rent of S$50-55 psf/mth is close to spot rates. Given the location of the mall, management remains confident about renewing the leases (c.44% by gross rent) due next year. Concurrently, management has guided for an internal leverage target of 40-45%. As such, OUE-HT has another c.S$400m of debt headroom for the upcoming acquisition of Crowne Plaza at Changi Airport. In addition, there are c.200 rooms in MOS that are scheduled for soft refurbishments.

What You Should Do

Given further room to grow both organically and inorganically, coupled with an attractive valuation of 7.7% FY15 dividend yield (vs. peers’ 7.3%), we maintain our Add rating and target price of S$0.96.