On track

• On track. 1Q09 results are in line with consensus and our expectations. DPU of 1.97cts forms 26% of our forecast for FY09 and was up 10% qoq (one-off expenses in 4Q08 for additional property tax with respect to 2006-07 and one-off MCST fees paid to Liang Court Complex). Net property income of S$20.6m declined 21.2% yoy, in line with falling tourist arrivals in Singapore and weakening demand for hotel accommodation.

• REVPAR down 20%. CDLHT’s Singapore portfolio occupancy hit a record low of 74.8%, down 8.9% pts from 4Q08. Revenue per available room (REVPAR) declined 20.2% qoq.

• Refinancing in the bag. CDLHT has secured a 3-year S$350m facility from DBS Bank to refinance all its S$297m debt due in Jul 09. This is made up of a S$270m term loan and a S$80m committed revolving credit facility. Based on the announced interest margin of 2.6% p.a., we estimate all-in cost of debt of 4.3%, below our assumption of 4.5%. The facility is secured on all of CDLHT’s five Singapore properties. Separately, CDLHT has another S$300m uncommitted multi-currency unsecured bridging loan facility, also with DBS. After the refinancing, asset leverage will be 19.7%.

• Maintain Outperform and DDM-based target price of S$0.68. The rest of 2009 would be difficult for CDLHT if visitor arrivals, which have been declining in the past 10 months, worsened. Although the rate of decline had slowed in Mar 08, more downside is possible if swine flu escalates into an epidemic. Nonetheless, we draw comfort that: 1) CDLHT’s properties are operated by seasoned hotel players; 2) management is working closely with the operators to drive revenue and contain cost; 3) there are no refinancing issues till 2012; and 4) Singapore’s experience with SARS has resulted in more precautionary measures in place. Thus, swine flu may not be as great a threat as feared. In the event of a further occupancy decline, CDLHT remains protected by its fixed rent component, which we estimate would translate into a DPU of 3.42cts, assuming a 90% payout (see report dated 27 Mar 09). Based on the last closing price of S$0.58, this would be a yield of 5.9%. Maintain target price of S$0.68 (discount 10.8%), still based on DDM valuation.

Safe enough

• Fixed rent of S$42.1m alone represents yield of 6.6%. The fixed component of CDLHT’s rent at S$42.1m represents 36.7% of CDLHT’s gross revenue in FY08. In a worst case scenario where the variable rent is zero, (basically implying 0% occupancy) and payout ratio of 90% the fixed rent component alone would represent a 6.6% yield at the current share price level, safe for the entire master lease period which has tenures ranging between 10 to 20 years.

• Visitor arrivals down 15.3% yoy in Feb 09. Visitor arrivals to Singapore reached 689,000 in Feb 09. The decline of 15.3% yoy was the steepest since Jun 08. Average hotel occupancy rate was 76% for Feb 09, representing a 3.3%-point decline from Feb 08. Historical occupancy trends suggest an occupancy support at about 70%. Occupancy hovering near historical supports and the presence of the fixed rent component for CDL-HT makes us turn positive on the stock.

• Upgrade to Outperform at unchanged target price of S$0.68. At the current P/BV of 0.38x, we believe the price is low enough, despite the brief price rally over the last two weeks. The floor on yield downside justifies CDLHT’s premium over Ascott Residence Trust at 0.29x P/BV, and the office REIT sector at 0.26x. We upgrade our recommendation to Outperform based on its relative upside (+32%) to our STI target of 1,800. We maintain our estimates and target price of S$0.68, still based on DDM valuation. Our unchanged estimates imply forward dividend yields of 14.9%.

Looking for value: Here

We see value in CDL HT emerging given that (i) it currently trades at 0.35x P/BV, which implies a valuation per room of S$239k, below our estimated replacement cost, and (ii) offers a FY09-10F DPU yield of 12%, of which 40% is fixed. In addition, we view that refinancing issues should not be a worry given the trust’s superior financial metrics. Positive catalyst in the near term will hinge on the re-financing of its ST debt. As such, we upgrade CDL HT to BUY, TP $0.65 based on DDM.

Trading below replacement cost. CDL HT is currently trading at 0.3x P/BV or an implied valuation per room of S$239k, which is below our estimated replacement cost of S$347k. Current valuation for its CDL HT’s hotel portfolio is unjustified given its positioning as Singapore’s largest hotel owner with more centrally located hotels which performance will pick up when the two IRs open.

Re-financing of ST debt should be completed. CDL HT’s short term refinancing requirement of S$290m loan should not be a major concern given that (i) the trusts’ low gearing of 19%, placing the trust in a relatively safe zone in the face of possible further writedowns, (ii) high interest cover in excess of 4.0x in FY09-10F, and (iii) strong sponsorship (M&C Holdings) backing.

Weak earnings should have already been priced in. Latest statistics from STB in Feb’09 showed hotel RevPAR declining 30% yoy but was higher m-o-m driven by higher occupancies. For CDL HT, we are revising RevPAR to decline by 25% in FY09-10 (15% previously) on the back of lower occupancy assumptions to 70%, resulting in a FY09-10 DPU estimate of 6.3-6.2 cts.

DPU yield of 12%. We believe that current price is an attractive entry point for investors to leverage on the positive medium term outlook for Singapore’s tourism sector. Investors of CDL HT will be rewarded with an attractive 12% DPU yield for their patience.

An inauspicious start

Downgraded to Hold