Author: kktan
OUE H-Trust – OCBC
Defensive lease structure to buffer headwinds
- 3Q14 DPU 2.5% above IPO forecast
- Healthy balance sheet
- Valuations appear fair
3Q14 results within our expectations
We met up with OUE Hospitality Trust (OUEHT) after its 3Q14 results which exceeded its IPO prospectus projections marginally but was within our expectations. Gross revenue came in at S$28.5m and was 0.7% higher than its forecast. DPU of 1.64 S cents was 2.5% above its 1.6 S cents projection. For 9M14, revenue and DPU of S$85.5m and 4.96 S cents was 0.7% and 3.1% above OUEHT’s forecast; and constituted 75.4% and 74.0% of our FY14 estimates, respectively. OUEHT managed to achieve a RevPAR of S$252 in 3Q14, versus its S$248 forecast, due to the completion of its Mandarin Orchard Singapore (MOS) renovation and higher guests’ contribution from the corporate business segment. However, this was still lower than the S$261 RevPAR attained in 3Q13 (after adjusting for the shorter financial period since it was listed on 25 Jul 2013). This can be attributed to the weaker visitor arrivals from Indonesia as a result of the presidential elections and strong SGD. We understand that Indonesians form ~25%-30% of OUEHT’s room nights occupied.
Resilient portfolio
Despite headwinds facing Singapore’s hospitality sector, we believe OUEHT’s defensive long-term master lease for MOS would provide a buffer to unitholders given its downside protection structure. Mandarin Gallery’s (MG) momentum is also likely to remain robust, as we expect continued positive rental reversions going into 2015. Both tenants’ sales and footfall at MG rose 5% YoY in 3Q14 despite the challenging retail scene in Singapore. In terms of balance sheet strength, OUEHT’s gearing stands healthy at 32.7%, with an average cost of debt of 2.2%. 100% of its debt has also been fixed via interest rate swaps.
Maintain HOLD
We maintain our HOLD rating and S$0.85 fair value on OUEHT. Although FY14F and FY15F dividend yield of 7.3% and 7.5% remain attractive, we believe valuations are fair. OUEHT is currently trading at a forward P/B of 1.0x.
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.
PCRT – CIMB
Switch to PREH
PCRT’s 3Q and 9MFY14 DPUs were in line, at 26% and 77% of our full-year forecast, respectively, largely coming from the earn-out in place. While operations improved marginally in terms of occupancy, core net profit was affected by one-off losses. We believe investors will be better off switching to the new vehicle PREHL which offers greater value as PCRT’s fundamentals are expected to remain anaemic. We maintain our Hold rating, with an unchanged RNAV-based target price (30% discount to RNAV).
Marginal operational performance offset by one-off losses
The commencement of operations at Jihua Mall, Foshan and Qingyang Mall, Chengdu in Aug 2013 and Apr 2014 increased both PCRT’s revenue and NPI. However, the improvements in underlying earnings was offset by one-off losses from impairment loss on receivables from master lease tenant of Shengyang Red Star Macaline Furniture mall (Guangcai Group), higher finance cost and net foreign exchange loss. As the earn-out for PCRT is set to expire at end-2014, we believe operational performance will be the key to PCRT’s share price performance. With overall occupancy at 80.3% and rental reversion anaemic given the challenging situation facing retailers, we believe investors could be better off by switching to PREHL.
Switch to PREHL
The voluntary conditional general offer to acquire PCRT shares using PREHL shares has commenced and is expected to have its first closing date on 8 Dec 2014. Current PCRT shares allow investors to get exposure to PREH at a 51-56% discount to RNAV. So essentially, PREHL allows investors to get greater value at the expense of lower dividend yield. Over the long term, we believe PREHL could re-rate in 3-steps: i) strata sales of up to 50% of the units in Chengdu and Beijing will be realised in 2015, ii) most China assets in PREHL will be completed in 2016/17, following which recurring rental income for the remaining 50% of the assets will commence and PREHL should record significant revaluation gains, and iii) stabilisation of investment properties in 2019/2020.
Maintain Hold
We keep our Hold rating on PCRT. While downside is limited by the value in PREHL, re-rating catalysts could take a while to materialise.
CDL H-Trust – OSK DMG
No Signs Of Recovery YTD
CDL Hospitality Trusts’ 3Q14/9M14 DPU dropped 1.1%/2.4% to 2.61/7.86 cents respectively. We assume coverage with a NEUTRAL and DDMderived SGD1.76 TP (from SGD1.63), a 3.5% upside from its current share price. With headwinds facing both the demand and supply side of the tourism industry not abating, we see limited growth prospects over the next two years for this stock.
- Results in line, 9M14’s distribution per unit (DPU) at 73% of our forecast. CDL Hospitality Trusts posted 11.9%/11.3% YoY rise in 3Q14/9M14 revenues to SGD40.1m/SGD121.7m respectively, aided by its Maldives resort acquisitions. DPU dropped 1.1% to 2.61 cents (3Q14) and 2.4% to 7.86 cents (9M14), partly on weaker Chinese tourist arrivals to Singapore, the Claymore Link mall’s ongoing refurbishments and the Maldives’ Jumeirah Dhevanafushi resort’s operating expenses not matched by its topline. Management earlier attributed this on seasonality, as 2Q/3Q was the resorts weakest quarters, with >70% of revenue contribution coming in 1Q/4Q on higher-yielding tourists from China, Europe and Russia. The trust’s YTD Singapore hotels revenue per available room (RevPAR) fell 1.6% YoY to SGD188, as the corporate and meetings business remained affected by tight travel budgets and the drop in Chinese tourists post China’s “forced shopping” ban in Oct 2013.
- Tourism outlook unlikely to turn around in 2014. For the first 21 days of October, RevPAR for Singapore hotels decreased by 3.5%, vis-à-vis the same period in 2013, despite the 2014 Women’s Tennis Association Championships being held here. Along Orchard Road, Shangri-La Hotels and Resorts opened the 502-room Hotel Jen Orchardgateway on 15 Sep with an introductory room rate of SGD250/night. Thus, we remain wary of the near-term competition of CDL Hospitality Trusts’ Orchard Hotel.
- Eyeing the Maldives. We expect the Maldives portfolio, ~10% of total net property income (NPI), to drive the major bulk of the trust’s 4Q14 DPU. Industry room inventory will probably continue to grow in Singapore with another 447 rooms slated for opening by end-2014. In 2015, an estimated 3,229 rooms are expected to open, further increasing room supply by 5.7% vis-à-vis 2014. The new room supply is likely to perpetuate the competitive environment going into 2015. We forecast 1% DPU CAGR over 2013-2016. We assume coverage with a NEUTRAL call and a DDM-derived SGD1.76 TP (from SGD1.63).
MGCT – OCBC
Delivering sturdy returns to unitholders
- 2QFY15 DPU rose 10.4% YoY
- Solid occupancy and rental reversions
- Minimal impact from Hong Kong protests
2QFY15 results met our expectations
Mapletree Greater China Commercial Trust (MGCCT) reported its 2QFY15 results which exceeded its IPO forecast but were in-line with our expectations. Revenue rose 6.9% YoY to S$67.5m (9.2% above its projection) due to positive rental reversions from Festival Walk (FW) and Gateway Plaza (GP). DPU of 1.606 S cents represented a growth of 10.4% and came in 11.6% ahead of its forecast. For 1HFY15, revenue increased 7.7% to S$131.3m and constituted 47.8% of our FY15 estimate. DPU growth of 11.1% to 3.162 S cents (10.5% above MGCCT’s IPO forecast) formed 50.0% of our full-year figure.
Operating metrics exhibit resilience and comfort
Overall portfolio occupancy remains unchanged QoQ at a healthy 99.2%. Positive rental uplift of 21% and 32% were achieved at FW’s retail and GP’s office segments, respectively, for 1HFY14. 87% of MGCCT’s expiring leases for FY15 have already been committed. Its financial position also remains solid, with a comfortable gearing ratio of 37.7% and all-in average cost of debt of just 2.1%. YTD, MGCCT had already hedged ~90% of its HKD forecasted distributable income. During 2QFY15, it further hedged >70% of its 2HFY15 CNY distributable income and >80% of its 1HFY16 HKD distributable income, thus mitigating its FX volatility.
Maintain BUY
The pro-democracy protests in Hong Kong have put the spotlight on companies with large exposure there. MGGCT assured us that it has seen minimal impact for FW as it is not located in the affected areas. Going forward, it also does not expect its performance to be adversely affected by these demonstrations. In fact, some of its F&B tenants actually saw an increase in reservations as some consumers switched locations from the impacted areas. Overall tenants’ sales at FW grew 3.6% to HK$2.5b in 1HFY15 although footfall inched down slightly by 1.7% to 19.2m. We retain our projections as results were within our expectations. Since our ‘Buy’ initiation on 3 Oct this year, MGCCT’s share price has appreciated 6.1%, outperforming the STI’s and FTSE ST REIT Index’s -0.5% and 1.1% movement during the same period. We reiterate our BUY rating and S$1.00 fair value estimate.