Approaching blue skies

• 2Q10 results a prelude to stronger 2H10

• Acquisitions are likely. Assumed S$150m in our models

• Maintain BUY with revised TP of S$2.14

2Q10 a strong quarter. 2Q results were in line. Gross revenue increased 51.9% yoy to S$30.7m boosted by the robust portfolio performance and added contributions from Australian portfolio. Net property income rose by an encouraging 43% yoy to S$20.6m. 2Q RevPAR grew to S$195 (+45% yoy, 6% qoq). Income available for distribution came in at S$21.7m (DPU of 2.87 Scts), before retained income for working capital purposes. For 1H10, CDL HT will be distributing 4.89 Scts.

With continual room rate hikes, CDL HT will reach previous RevPAR peaks of S$222/night in 2011. We expect continued demand squeeze for rooms in 2H10 on the back of upcoming events, Youth Olympics Games and Formula One. Its hotels are relatively full at average occupancies of 89%. Hence CDL HT will deliver stronger earnings through incremental room rate hikes. In addition, FY11 earnings will benefit from the renewal of CDL HT’s global corporate accounts, which were locked in at low average rates back in Sept-Nov’09. Hence, we raised FY11 RevPAR growth to 15% (from +12% currently) in anticipation of higher secured rates.

Geared for growth – assuming S$150m worth in acquisitions by end 2010. Management is on the lookout for assets (in Singapore, Japan as well) and we expect the trust to make the acquisitions within the next 6 months. Studio M, currently held by its sponsor is a likely target, as the hotel is currently operating at >90% occupancies and room rates of S$150-S$170 per night. We have assumed asset injection of S$150m @ 6.5% yield, funded by debt.

BUY, TP adjusted to S$2.14. We raised our TP to S$2.14 (from S$2.03 previously) on higher FY11 earnings with new acquisition assumptions. We strongly believe that CDL HT is at the beginning of a multi-year secular recovery in the local tourism sector. Execution on acquisitions will drive earnings growth and act as future catalysts for the stock. Stock offers an attractive FY11 yield of 6.5%

Experiencing supernormal organic growth

2Q10 results beat street’s expectations. CDLHT reported 2Q10 DPU of2.87¢ (+38.6% YoY; +11.2% QoQ), in-line with of our FY10 DPU forecast of 11.1¢ but 10% above street’s forecasts of 10.3¢. Net property income surged 49% YoY to S$28.7m on the back of higher RevPARs achieved for all of its hotel properties. RevPAR rose 45% YoY (above our 30-43% estimates) due to a 13ppt surge in occupancy to 89% and 24% rise in average daily rate of S$220. Maintain BUY, DDM-derived TP of S$2.30. Our top S-REIT pick.

1m visitors in July – a banner figure for the media. Visitor arrivals continued to power ahead, surging 27% in June, chalking 7 consecutive months of record visitor arrivals. Judging from the current growth momentum, we expect Singapore visitor arrivals to cross the 1m figure in July (possibly even hitting 1.1m) – a banner figure for the media. The Singapore Tourism Board (STB) is expected to publish those figures between 25-27 Aug. We expect the pipeline of events such as the inaugural Youth Olympic Games (August) and Singapore Grand Prix (September) to augment the buzz within the sector; hence creating significant euphoria and engendering further yield compression for CDLHT. According to management, STB was sanguine that visitor arrivals may even surpass current expectations of 11.5-12.5m visitors for 2010.

Acquisition on the cards; Studio M hotel could be next. Management hinted that they may undertake another acquisition within a few months and Studio M hotel could be its top acquisition choice given the shorter-than expected gestation of Studio M; with occupancy over 90% and ARR of ~S$170. CDLHT is also on a lookout for hotels in Japan which offer yields of 6-7%.

Maintain BUY; our top S-REIT pick. We maintain our TP of S$2.30, in view that strategic acquisitions will likely boost longer-term DPU growth potential. Recent cash call confirms management’s interests in undertaking strategic acquisitions within the next few months. Stock trading at attractive FY11 yield of 6.4%.

Acquisition in the near horizon

• Maintain Outperform, target price reduced to S$2.04 (from S$2.20). Recent tourism data points on occupancy and room rates, reinforced our positive view on the hospitality sector in 2010. We factor in dilution from CDLHT’s recent private placement and see DPU fall 5-7% in FY10-12. Our DDM target price falls accordingly to S$2.04 (from S$2.20), our reduced DPU forecast of 10.8cts for FY10 representing a 6.1% yield for CDLHT. Despite our lower target price, we remain positive on the company as we believe the strengthened balance sheet points to acquisition on the near horizon. Other stock catalyst could include a better than expected performance at its 2Q results to be released at end July, and refinancing on more favourable terms.

• Boom time for Singapore hotels. Singapore saw its 6th consecutive month of record visitor arrivals. Y-o-y, REVPAR rose 53.5% in May boosted by a 17%-pt rise in occupancy to 85% and a 13.6% increase in room rates island-wide. We believe that mega events in 2H10 will enable hotels to raise rates further in the year. Management commented that its Singapore hotels’ portfolio occupancy levels are also nearing the last peak of 89% in 2007/2008.

Locked and loaded

• Shoring up balance sheet with S$197m from placement with slight dilution to earnings

• Armed with strong financial muscle to acquire assets with gearing at only 19%

• Maintain BUY, TP adjusted to S$2.03. Additional 18Scts upside to TP assuming S$400m of acquisitions

Shoring up balance sheet. CDL HT recently completed a placement of new shares (116.9m new units, representing 13% of share capital), raking the trust S$197m in net proceeds, which included exercising an upsize option to raise an additional S$50m. These proceeds will be utilized towards paying down current debt obligations, resulting in the trust having a lower gearing ratio of c19%, down from 31% previously.

Minimal adjustment to DPU of up to 6%. Dilution to DPU of c5-6% in FY10-11F to 10.8 Scts and 11.6 Scts, respectively, due to the enlarged share base offset by interest savings from the repayment of its loans (S$116m towards repayment of S$ bridging loan for its Australian acquisition & remaining S$80m for the repayment of its loan facility with DBS Bank).

Low gearing level of 19% opens up acquisition possibilities. With a re-capitalized balance sheet, CDL HT stands strong with the financial muscle to undertake larger acquisition opportunities, estimated up to S$400m, assuming a long term gearing target of c35%. This financial flexibility will come in handy when CDL HT participates in any opportunistic tender sale exercise where the ability to close the deal fast is key.

Maintain BUY, TP adjusted to S$2.03. Our target price is adjusted 7% downwards to S$2.03 to take into account the enlarged share cap. Our numbers do not assume any acquisitions. Assuming acquisitions of S$400m on a gearing of 35% could add a further 18Scts to our target price.

Cash call necessary for probable acquisitions

Cash call exercise to beef up balance sheet. CDLHT announced the issue of 84.8m – 87.7m new units at between S$1.71-1.77 per unit to raise gross proceeds of S$150m, subject to an upsize option to raise additional proceeds of up to S$50m. The issue price represents a discount of between 6.3-9.4% to VWAP of S$1.88 and an increase in share capital of about 10%. According to management, the rationale for this private placement is aimed at providing CDLHT greater debt headroom and financial capacity on potential acquisitions. Maintain BUY, DDM-based TP of S$2.30.

Mild DPU dilution of 3.8% with equity placement. Approximately S$116m will be used to repay its SGD portion of the bridging facility (~5% interest cost) which was used to finance the 5 hotels in Australia, and between S$31-80m to repay part of a DBS loan facility. With a cost of equity of ~6%, we estimate the placement to dilute CDLHT’s FY10 DPU by 3.8%. Nevertheless, the cash call will strengthen its balance sheet, bringing its gearing from 30.9% to 22.6%; amongst the lowest compared to other S-REITs. Large cap peers such as AREIT, CCT, CMT and Suntec have gearings of between 30-33%.

Acquisitions within 6-12 months. Management is seeking to undertake another acquisition within the next few months. They have confirmed their interest in Ibis Bencoolen hotel, which has been put up for sale via a private tender. The 538-room hotel could fetch about S$200m at about 6% yield. Based on a gearing target of 30-35%, CDLHT has a debt headroom of between S$200-350m; sufficient to finance an acquisition of such scale.

Maintain BUY; our S-REIT top pick. We reduce of FY10 DPU estimate from 11.6¢ to 11.1¢ but maintain our TP of S$2.30, in view that strategic acquisitions will likely boost longer-term DPU growth potential. We expect Singapore to register its record 1m visitors in July – a banner figure for the media; hence creating significant euphoria within the sector and engendering a further re-rating for CDLHT.