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.

A Satisfying Stay

We initiate coverage on CDL Hospitality Trust (CDL HT) with a BUY recommendation and fair value of $1.72. CDL HT currently owns hospitality related properties in Singapore and New Zealand. We believe the Trust is poised to benefit from the economic recovery coupled with the government efforts to boost the local tourism industry.

Tail-end of economic recession? Singapore technically exited the recession in 2Q09 with a q-q SAAR GDP of 20.7%. The official forecast from MTI is a contraction of 4% to 6% for 2009. That being said, the share price of CDL HT has re-rated from 0.3 times book value seen in March this year to approximately 1 times book value currently, on optimism of the recovering economy. We believe that CDL HT will continue to re-rate to its historical average of above 1.5 times book value seen during the economic boom of 2007 if the cards are lined up properly.

Tourism 2015. The Singapore government has set a target to achieve 17 million tourist arrivals and tourist revenue of $30 billion by 2015. Hospitality operators like CDL HT will stand to benefit from the government initiatives.

Healthy balance sheet. CDL HT has one of the lowest gearing among the S-REITs. We view this as prudence on management part in managing capital usage well. CDL HT has gearing of 19% and total debt of $287 million. We believe with the backing of a strong sponsor, it has better access to funding sources.

Strong sponsor, benefits aplenty. The sponsor of CDL HT is M&C Hotels plc which is majority owned by City Development Ltd. With a right of first refusal from the sponsor, there are ample acquisition opportunities for CDL HT to expand its portfolio. Furthermore, management has indicated that it has the expertise to operate its hotels if any of its lessees decides to terminate their leases.

Time for a breather

• Downgrade to Neutral from Outperform; switch to PLife REIT. We are still positive on an IR-led recovery in Singapore, as reflected in our relatively bullish above-consensus estimates. We maintain our earnings estimates and DDM-based target price of S$1.41 (discount rate 9.06%). However, at 1.04x P/BV and yields of 5.5%, we believe CDLH-HT has been fairly valued. We recommend a switch to Parkway Life REIT (Outperform, S$1.10, target price S$1.31). PLife REIT trades at 0.8x P/V with a forward yield of 6.8%.

• 2H09 recovery likely to be stronger. Tourism indicators including visitor arrivals, average hotel room rates and occupancy levels are showing clear signs of emerging from trough levels. Additionally, we expect the short-term supply of hotel rooms to remain tight as the opening of new rooms at Singapore’s two integrated resorts is expected to be staggered over 2010-11. The likely early opening of Resorts World Sentosa is likely to revive REVPAR in 2H09.

• Acquisitions not likely in short term. Even though rising prices have depressed dividend yields, near-term acquisition catalysts appear to be lacking due to a conservative and value-hunting management.

• Up to 30% REVPAR recovery priced in for FY10. At our target price of S$1.41, we have assumed a REVPAR recovery of 30% for CDLHT’s Singapore hotels. At this level, CDL-HT will be trading at its book level of S$1.42/share.

Extending its winning streak

• Recovery in sight
• We believe our 2H09 DPU estimate of 4.05 Scts (17% above consensus) is achievable
• Prospects for a further re-rating driven by earnings
• Maintain BUY, TP S$1.57 based on DDM

Signs of recovery sighted. July’09 tourist arrival statistics were very encouraging. We believe that newsflow for Singapore tourism industry should start turning positive from Aug-Sept’09 on the back of a lower base effect. In addition, sequential improvements in hotels occupancy levels is reassuring as further room rate cuts should be unlikely on the back of better room utilization rates.

Earnings likely to surprise consensus – again. Consensus is too conservative on CDL HT’s FY09 performance, in our opinion. With a 1H09 DPU of 3.86 Scts paid out, market is factoring in a lower 2H09 DPU of 3.44 Scts vs our estimate of 4.05 Scts, which does not jive with an improving outlook for tourist arrivals. We see possibility of another round of upward DPU adjustment come 3Q09. In addition, consensus has not priced in the positive ripple effect from the tourist influx on RevPAR in 2010.

Implied value per room of S$550k – not lofty. CDL HT’s implied valuation is on par with the recent transacted price of Swissotel Merchant Court. We believe CDL HT should trade at a premium given (i) strong support from Hong Leong and (ii) established business relationships, (iii) larger number of room inventory gives the trust economies of scale.

Maintain BUY, TP S$1.57. We see prospects for a further rerating driven by earnings in 2H09. Our TP is raised to $1.57 from higher RevPAR assumptions (+5 pct) and lower equity risk premium assumptions. We urge investors to take a long-term perspective on CDL HT, which will be a beneficiary of Singapore’s push for the success of the integrated resorts come 2010. CDL HT offers a FY09-10F yield of 5.7% – 7.1%.