Maldives foray proves to be a gem

• Singapore Airshow boosted 1Q14 occupancy by 1.2ppt YoY and RevPAR by 0.5% YoY; 2H14 should benefit from opening of Sports Hub and hosting of more world-class events.
  
• Maldives resorts did better than expected, contributing 12% of 1Q14 NPI; DPU raised by 2.5% to reflect this.
  
• TP raised to SGD1.91 (from SGD1.75); reiterate BUY.
  

Results in line with expectations

CDLHT posted a 15.3% YoY rise in 1Q14 revenue to SGD43.8m, bolstered by its Maldives resort acquisitions. Revenue would have been higher were it not for the weaker trading performance of its Australian hotels and partial closure of Mercure Brisbane for refurbishment. DPU rose 2.2% YoY to 2.75 SGD cts. With the return of the biennial Singapore Airshow in February, CDLHT’s Singapore hotels saw 1Q14 occupancy improved by a modest 1.2ppt YoY to 88.2% and RevPAR edged up 0.5% YoY to SGD192. Balance sheet remained strong with a low gearing of 29.9%, with 21% due for refinancing in 2014 and 36% in 2015.

Maldives resorts post stellar performance

CDLHT expects another 2,000 hotel rooms to be added during the remainder of 2014 (2013: 3,357). This should provide some relief to hoteliers. The opening of the Sport Hubs in June and the hosting of events such as World Club 10s Rugby in the same month and Women’s Tennis Association Championships in October would also add to the attractiveness of Singapore’s MICE infrastructure. The Maldives resorts, acquired last year, delivered stellar performance in 1Q14. Despite making up just 8% of CDLHT’s asset value as of end-Dec 2013, they contributed 12% of 1Q14 NPI and 20% of revenue. Visitor arrivals to Maldives registered strong growth of 11.6% YoY for the first two months of the year. As Chinese outbound travel to the island nation continues to grow, CDLHT can expect to benefit from rising Asian affluence. We adjust our FY14E-16E DPU by close to 3% on better-than-expected performance from Maldives. Reiterate BUY with a higher DDM-derived TP of SGD1.91.

FY14 a better year for hospitality

• Expect hotel room supply to register 5.7% CAGR over 2013-2015, in line with demand growth.
  
• Expect corporate bookings to be more favourable in 2014 as the USD strengthens against the SGD.
  
• Brace for a tactical recovery this year with the hospitality outlook turning more positive.
  

Tourism growth slows but supply can be absorbed

A total of 8,096 new rooms from known hotel projects will come on-stream between 2014 and 2016, according to commercial real estate services company CBRE. This constitutes ~15% of available stock (2013: 54,962 rooms). Nonetheless, we expect the balance between supply (measured in terms of available room nights) and demand (measured in terms of paid lettings) to stay on an even keel over 2013-2015, growing at 5.7% CAGR. RevPAR growth is projected to shrug off the 2% decline in 2013 to rise 3% this year before sliding by 1% in 2015 and 2% in 2016. We keep our forecast visitor arrivals intact at 16.4m (+6%) in 2014 and 17m (+3.7%) in 2015, the latter in line with Singapore Tourism Board’s target as well.

Better performance in store in FY14

Compared with last year, the biennial events to be held this year include crowd-pullers such as the Singapore Airshow last month, Food & Hotel Asia exhibition next month and the WTA Championships in October. With the USD strengthening against the SGD, we expect corporate bookings to also turn favourable. In addition, there will be a reprieve from new room supply this year – 2,037 vs 3,766 last year. CDL Hospitality Trusts currently trades at a 1% discount to its book value, which we believe is due to earlier concerns over hotel room glut and falling RevPAR. With the outlook for the hospitality industry turning more positive this year, we think investors can position themselves for a tactical recovery. Maintain BUY with our DDM-based TP unchanged at SGD1.75 (discount rate of 7.1%, terminal growth rate of 1%).

Tide is turning

CDL-Hospitality Trusts (CDL-HT) just released its 4Q13 earnings with revenue and DPU growing by 2.8% yoy and 0.7% yoy respectively. These results are inline with our FY13 estimate with a deviation of 2.0% . On the back of more events coupled with the recovery of both global economy and corporate spending, we maintain a more uptick outlook of the hospitality market in FY14. However, with an expected 2,926 rooms coming on stream this year, the growth in RevPAR is expected to be limited to 2-3%. Upgrade to Add with unchanged DDM-based (discount rate: 8.9%) TP of S$1.79.

Results

For FY13, CDL-HT registered a drop in both NPI and distributable income by 1.4% and 3.1% respectively. RevPAR for the quarter dropped to S$187 (from S$191 in 3Q13), mainly attributed to lower gross revenue from the Singaporehotels and forex losses as a result of the weaker Australian dollar. This was mitigated by additional rental contributions of S$10m from Angsana Velavaru, Maldives.

Outlook brightens

As the global economy continues to recover, we expect corporate spending to strengthen correspondingly in FY14. With c.50% of total revenue attributed from this avenue, we expect CDL-HT earnings to strengthen. In addition as bi-annual events such as the Aerospace show and Food & Hotel Asia take place this year, coupled with more MICE events, we expect the hospitality market to benefit as a whole. However, with 2,926 rooms coming online in FY14, the positivity is expected to be dampened by the additional competition as the market digests the additional supply.

Upgrade to Add as positivity outweighs

CDL-HT is trading at 7.0%/7.4% FY14/15 dividend yield. As the positivity in the hospitality outweighs the additional supply of hotel rooms in FY14, while CDL-HT continues to benefit from the strong RevPAR growth of its two Maldives hotels, we believe a turn around to the stock is imminent. Upgrade to an Add with unchanged DDM-based TP of S$1.79 as management continues to boost earnings via potential acquisitions in countries such as Japan, Australia and Asia.

The waiting continues

While the hospitality sector remains weak, we believe the negativity has largely been factored in given CDL-HT’s current valuation of 1xP/BV. We continue to wait for re-rating catalysts such as turnaround signs in the hospitality sector and accretive acquisitions.

3Q13 results were slightly weaker than our estimate with DPU for the quarter accounting for 23% of our FY13 forecast and 9M13 DPU at 71%. We lower our estimates to account for the slightly weaker-than-expected results and roll over our valuations to FY15. This nudges up our DDM-based target price (discount rate: 8.5%) to S$1.76. Maintain Neutral.

Earnings remain weak

During 9M13, CDL-HT registered a drop of 1.7% yoy in NPI and a fall of 3.9% yoy in distributable income. This can be mainly attributed to lower gross revenue from the Singapore hotels and forex losses as a result of the weakening Australian dollar. However, this was mitigated by additional rental contributions of S$1.9m from Angsana Velavaru, Maldives. Similarly, on a qoq basis, revenue and distributable income dropped 0.8% and 2.2%, respectively, as RevPAR remained weak at S$191 (-6.4% yoy).

Challenging local market

The weak Singapore hotel performance can be mainly attributed to an increase in competition due to additional new supply of hotel rooms in the market and weak corporate spending (accounts for c.50% of total revenue). As a result, occupancy at these hotels was replaced by an increase in the leisure business, which was secured at lower rates.

Maintain Neutral

With the anticipated high supply of hotels for CY13-15 (5.9% CAGR), we remain concerned about the possibility of near-term oversupply as visitor arrivals are forecast to grow at a slower rate (5.7% CAGR). However, given its strong balance sheet and management’s active search for acquisition targets, we maintain our Neutral call on CDL-HT, with a turnaround in the hospitality sector and accretive acquisitions as key re-rating catalysts.