Worst should be over

• DPU in line. 2Q09 results were in line with our expectations but exceeded consensus. Payout to unitholders is 90%, at S$15.8m. This translates to a DPU of 1.89cts, or 21% of our full-year forecast. 1H09 DPU amounts to 3.86cts, or 49% of our full-year forecast, which assumes a 90% payout. Actual DPU available for distribution based on a 100% payout for 1H09 is 4.25cts, 54% of our FY09 forecast.

• Room rates down 30% yoy; occupancy down 12% pts yoy. CDLHT’s Singapore portfolio occupancy was 75.5% (-12% pts yoy), recovering moderately (+1%) from the last quarter. This was despite more difficult operating conditions with cancellations and meetings held back due to H1N1. Average room rate for the Singapore portfolio was down to S$178 (-30% yoy). However, this fall is measured against 2Q08, CDLHT’s strongest quarter since its listing.

• More surprises in the bag. Management revealed that July’s occupancy had risen above 80% in Singapore, in line with industry performance. This is a positive start to 2H09. We are expecting more events such as the F1 night race, the continuance of the APEC Conference 2009 till November, and the return of bookings for conferences and meetings postponed by H1N1. We expect more upside surprises from: 1) possibly reduced interest cost as loans could be refinanced at lower margins; 2) a return of payout to 100% as early as 2H09 if conditions continue to improve; and 3) room rates priced on a daily basis.

• Maintain Outperform; DDM-based target price raised to S$1.41 (from S$0.99). CDLHT’s performance has met our above-consensus estimates despite difficult conditions. We are positive that it is out of the woods. Hence, we revise our assumptions for: 1) full-year average occupancy to 75-85% (from 70-80%); and 2) average room rate up by 15% in 2010, from +3%. We maintain our 90% payout assumption. Our DPU forecasts increase by 4-11% following the changes in our assumptions. Our target price rises accordingly to S$1.41 (discount rate 9.1%), offering 19% potential price upside and forward yields of 7%. We believe CDLHT will be one of the key beneficiaries of integrated resorts opening in 2010.

Fewer tourists, H1N1 take toll on CDLHT in Q2

Trusts’ distributable income falls 36.8% to $15.8m, DPU drops to 1.89 cents

CDL Hospitality Trusts (CDLHT) has posted a 36.8 per cent year-on-year fall in its second-quarter distributable income to $15.8 million, dragged down by lower tourist arrivals and the impact of the H1N1 outbreak.

The result brings its distribution per unit (DPU) for the three months ended June 30 to 1.89 cents, down from 3.03 cents in the year-ago period.

‘This achievement comes amidst a challenging operating environment for CDLHT in the first half of 2009,’ said Vincent Yeo, chief executive of the trust’s manager. ‘On the back of the global economic turmoil, the tourism and hospitality sectors at large have seen a sharp reduction in travel and tourist arrivals.

‘The situation was further exacerbated in the second quarter by the global outbreak of Influenza A (H1N1) and the knee-jerk reaction of the public to the viral flu, which led to some cancellations and postponement of events. Despite tougher conditions in Q2 2009, we are heartened that our hotels managed to maintain a relatively healthy level of profitability as a result of our proactive cost containment measures.’

The real estate portfolio in CDLHT includes Orchard Hotel, Grand Copthorne Waterfront Hotel, M Hotel, Copthorne King’s Hotel and Novotel Clarke Quay, New Zealand’s Rendezvous Hotel Auckland, and the Orchard Hotel Shopping Arcade.

Net property income for the three months ended June fell 30.6 per cent to $19.2 million. Gross revenue shed 31.5 per cent to $20.2 million.

Average occupancy rate slipped to 75.5 per cent from 87.1 per cent in the same quarter last year. Average daily room rate also shrank 30.2 per cent to $178.

‘The outlook for CDLHT for the rest of 2009 will depend largely on an upturn in visitor arrivals as market sentiment continues to improve, with the economy recently displaying incipient signs of recovery,’ said Mr Yeo. ‘We are already seeing some improvement in demand in the months of June and July as both corporate and leisure travel showed signs of an uptrend compared to the first five months of 2009.’

Before deducting for income retained for working capital, income available for distribution in the quarter went down 30.6 per cent to $17.4 million.

For the first half of the year, distributable income fell 33.5 per cent to $32.3 million. Gross revenue slipped 25.6 per cent to $42.8 million, while net property income dropped 26 per cent to $39.8 million.

The balance sheet showed a $293 million debt repayable yesterday. To refinance that, CDLHT had earlier secured a three-year $350 million bank facility, consisting of a $270 million term loan and an $80 million committed revolving credit facility.

The new facility bears interest at the Singapore dollar swap offer rate plus an interest margin of 2.6 per cent per annum.

Following the announcement of its results, which were released late on Thursday night, shares of CDLHT closed 3 cents up at $1.21 yesterday.

Bottom Seen

IR catalyst from 2010

• Maintain Outperform. Management guides that 2Q09 results could be weaker than in 1Q09. However, an increased number of conventions and events in the second half of 2009 is expected to support full-year performance. We believe that CDL-HT remains well-positioned to benefit from the tourism boost that the two integrated resorts (IR) should bring about from 2010. Chinese and Indian tour agencies are already marketing Singapore as a single tour destination (as opposed to the traditional marketing of Singapore as a stop-over destination, or lumped together with its neighbouring countries). This should have a significant impact on the length of visitors’ stay in Singapore, and hence REVPAR levels for Singapore hotels.

• Upgrading our estimates. We increase our occupancy forecast for CDL-HT’s Singapore portfolio to 82% from 80%. We also raise average room rate expectations to 3-5% growth from 5-10% declines earlier, over 2010-11. Additionally, with its last refinancing in Apr 09, CDL-HT will have no more debt due till FY12. We reduce our cost of debt assumptions to 4% from 4.5% to factor in lower-than-expected spreads obtained. We also use a lower discount rate 10.6%, down from 10.8% as we apply a lower risk-free rate of 4.8% across our universe.

• DDM-derived target price raised to S$0.99 (from S$0.68). Following the changes in our estimates, our target price rises to S$0.99. We continue to like CDL-HT for its low asset leverage of under 20%, and mid-tier portfolio, which would enable it to stay resilient despite the weak tourism outlook.

Stalling of rally at key resistance heralds possible near-term downside

– CDL Hospitality Trust could be facing more near term downside as the price seems to have stalled at its key $0.845 resistance (also hit the upper Bollinger band) on relatively high volume. A lower close today would confirm the bearish price reversal.

– And downside momentum looks set to accelerate in the near term. The RSI has already turned down just shy of the overbought region while the stochastic indicator is about to make a negative crossover inside the overbought region. The Accumulation/Distribution indicator also made a sharp bearish reversal yesterday.

– We expect the stock to find initial support at $0.79 (2-month uptrend line and centre Bollinger band), breaking which, the next key support is likely at $0.72 (minor troughs in May ’09 and Jun ’09 and lower Bollinger band).

– Above the $0.845 key resistance, we see $0.92 (minor peak in Oct ’08) as the next resistance.