CDL-HTrust – DBSV

Go with the leader

• Studio M Hotel will anchor trust’s position as leading hotelier in Singapore

• Strong tourism industry performance in Jan-Feb’11 bodes well for Singapore hospitality sector

• BUY Call, TP S$2.30 maintained

Studio M hotel will anchor CDL HT’s leading position in Singapore. CDL Hospitality Trust’s (“CDL HT”) proposed acquisition of 360-room Studio M hotel, at S$154m ($428k/key) is attractive in our view. The initial yield of 6.1% has more upside as channel checks revealed that Studio M’s rate has moved up c15% to S$200/night in recent months (from S$174/night in 2010) and we see further upside in 2011 given its strong occupancy levels. With 82% of earnings derived from its Singapore hotels, we forecast CDL HT to deliver a strong 13% organic earnings growth for FY11-12, more than S-REIT peers. The manager has called for an EGM to be held on the 29th April’11 and as this acquisition is an interested party transaction, the sponsor and related parties, will not be able to vote.

Industry’s sustained strong performance in first 2 months of 2011 bodes well for the trust. Singapore continues to see a record breaking 2m visitors in Jan-Feb’11. Looking ahead, arrival figures from Japan may weaken in March 2011 due to the Earthquake Disaster. As per our report titled “Winds of Change” issued on 29 Mar’11, we believe that emerging travel patterns post March 2011 could be in Singapore’s favor as Singapore is a viable alternative travel destination (with its 2 IRs) from visitors expected to delay visiting Japan over the coming months. Given the trust’s leading position as one of Singapore’s largest hotel owners, we believe it will stand to benefit from such a growing trend.

Maintain BUY and DDM-based TP of S$2.30. The group’s strong DPU growth profile is attractive plus low gearing of c26% post acquisition, which remains below management’s optimal level of c40%. Hence, the additional debt-funded acquisition headroom may be utilized for opportunistic ventures.