CDL H-Trust – DMG

Legs To Ride The ‘V’ Recovery

Best proxy to a multi-year tourism resurgence. We initiate coverage on CDL Hospitality Trusts (CDLHT) with a BUY recommendation and target price of S$1.80. We are sanguine that CDLHT remains the best proxy to a multi-year tourism resurgence that will take place next year. CDLHT is our top pick among the large cap S-REIT counters. Price target is based on a 9.3% cost-of-equity assumption and a terminal growth rate of 3%.

Supernormal visitor growth of 30% – a real possibility! The success stories of countries with similar service offerings reinforce our view that Singapore’s visitor growth will easily punch through the 15-20% level in the initial year of opening (possibly even 30%), with sustained 3-5% growth thereafter. Visitors are expected to extend their stay, leading to a 20-35% spike in visitor days in 2010. Our feedback from hotel operators indicates that pricing power will return when occupancies hover above 80%. We expect systemic occupancies to rise to 84% next year, with ARRs rising to S$250. We believe room demand will immensely overshadow the 16% new supply that is projected to come onstream in 2010.

Stock has outperformed, but still at mid-cycle valuations. We believe 2Q09 reflects the bottom of the earnings cycle for hotel operators, and a ‘V’ recovery will likely transpire beyond 2010, powered by the resurgence in tourism offerings. Despite surging from its S$0.43 March lows, we do not think stock price is fully reflective of the sated impact of the IRs. In the heydays of 2007-08, CDLHT traded at ~5% yield, below the current 7.2% level. We estimate FY10 DPU to spike 35% to 10.8¢, inching above the FY08 levels of 10.6¢.

Euphoric aura could see yields compress to 5%. We believe the stabilising global economy and the twin openings of the IRs will remain as euphoric events in 2010, providing sustained performance for CDLHT’s stock price. We suspect CDLHT could trade towards its heyday yields of 5%, implying a recursive fair value of S$2.15. Even at our DDM-TP of S$1.80, yields stand at 6%, a conservative peg in our view. CDLHT trades at 7.2% FY10 yield, which in our view suggests that the stock has further legs to ride the ‘V’ recovery.