CDL H-Trust – CIMB

Going strong

With more attractions and events lined up, we share management’s optimism on the local hospitality industry during its briefing. We also like management’s selective and value-driven approach towards acquisitions. CDLHT remains ourtop pick among the S-REITs.

We raise DPUs by 1% on higher REVPARs, offset partially by lower payouts. Backed by conservative book valuations, valuations are not excessive at 1.1x P/BV vs. a long-term average of 1.3x. Maintain OP. We see catalysts from stronger REVPARs and accretive acquisitions.

What Happened

An upbeat management shared its observations and views on the local hospitality industry. Backed by sustained demand from corporates and tight occupancy, management guides that the industry has been able to increase corporate renewal rates by an average of 5%. While upcoming room supplies may pose competition, the deferment of some projects could take some of the heat off. Meanwhile, management remains highly selective and value-driven towards acquisitions. It believes that local transacted values of S$900k per room are excessive and does not see reason to partake given the pipeline from its sponsor. Payouts should be at the low end of 90+% and will continue to match retained earnings against maintenance capex needs to improve efficiency and margins.

What We Think

Backed by events and tourist attractions, resilient Asian economies and moderate upcoming room supplies, the outlook for hospitality remains positive. We continue to like management for its prudence while a strong balance sheet (asset leverage of 25.3%) provides debt headroom for acquisitions and AEI (e.g.Orchard Hotel Shopping Arcade after the finalisation of plans).

What You Should Do

While the stock has been re-rated16% since our last note in Dec 11, we continue to see value at 1.1x P/BV vs. its long-term average of 1.3x. Book valuations of about S$600k per room key for its local properties remain highly conservative when benchmarked against theS$900k per room key (implied cap rate of <5%) in some market transactions. Maintain Outperform.