Upgrade to BUY on valuation grounds

• Slight RevPAR growth for industry in Aug
  
• Reasonable entry point
  
• Upgrade to BUY
  

Great variance among tiers

Based on STB figures, we estimate that Hotel RevPAR saw a mild growth of 2% YoY to S$232 in Aug. This compares favorably to the overall YoY decline for Jan to Aug of 1.9%. While the growth in Aug is encouraging, we do note that for the month, there was quite some variance in the YoY movement in average room rates between the tiers: Luxury (+9.4% to S$452.10), Upscale (-12.0% to S$264.60), Mid-Tier (+0.4% to S$189.50) and Economy (-7.1% to S$103.90). Similarly, Luxury and Mid-tier were the better performers in terms of RevPAR YoY change: Luxury (+20.1% to S$415.50), Upscale (-11.4% to S$236.70), Mid-Tier (+1.0% to S$170.20) and Economy (-8.1% to S$88.80). CDLHT’s hotels in Singapore are most appropriately classified as being in the Mid-tier/Upscale categories, so it is likely to demonstrate a blend of the performance figures from those tiers. With generally positive sentiment from hoteliers about Sep, we could see stabilization in the sector.

Negative factors more than priced in

CDLHT is 23% below its 52-week peak of S$2.12 on 17 Apr, dragged down by poor sector data points and general concern about oversupply; we forecast that that hotel room supply will expand at 6.5% p.a. over 2013-2015 while hotel room demand will grow at 5.4% p.a. However, we believe that the negative news has been priced in and the current price level offers a reasonable entry point.

Raise FV to S$1.83

Incorporating a risk-free rate of 2.4% (versus 2.7% previously) into our DDM model to reflect lower bond yields, we raise our FV on CDLHT to S$1.83 from S$1.56. On valuation grounds, we upgrade CDLHT from a Hold to a BUY. CDLHT is trading at an attractive FY13 dividend yield of 6.4%, versus 6.9% for its peers. It should be kept in mind that CDLHT has been conservatively paying out 90% of its distributable income, with the remainder retained for working capital. This is in contrast to the 100% being paid out by its peers, i.e. ART, FEHT and OUEHT. Hence a like-for-like comparison would see CDLHT trading at a yield of 7.1% (assuming 100% payout).

Industry remained challenging in July

• Huge supply growth for mid-tier hotels
  
• QE tapering fears still affecting yield plays
  
• Maintain HOLD
  

Had been hoping for a better July

In our 19 Aug Hospitality report we stated that industry contacts indicated that July and August may have been showing RevPAR growth on a YoY basis for the industry as whole. However, disappointing data for the sector in July has just been published on September 1. Based on STB figures, we estimate that RevPAR fell 8% YoY for July. We think certain players are continuing to perform significantly better than their peers within each category, and 3Q13 for the sector as a whole could well show a contraction like in 1H13.

Challenging environment continues

We believe that hotel room supply will expand at 6.5% p.a. over 2013-2015 while hotel room demand will grow at only 5.8% p.a. Apart from the usual uplift in even numbered years like 2014 from more MICE events, this supply-demand imbalance will put pressure on real RevPAR growth. CDLHT’s hotels in Singapore are best classified as being in the Mid-tier/Upscale categories. It is worth highlighting that we anticipate a huge growth of 10.9% p.a. in mid-tier room supply, which means that CDLHT’s Singapore hotels could face significant RevPAR pressure over the medium-term. Recall that the 2Q13 RevPAR for CDLHT’s Singapore hotels fell 8.5% YoY to S$193. They were affected by increased competition, weaker corporate demand and the absence of a biennial event in April.

Yield plays hit by inevitable QE tapering

Concern over the timing of QE tapering by the US Federal Reserve and its impact on interest rate and bond yields continues to weigh on the performance of the Asian markets and yield plays like CDLHT since May.

Cut FV to S$1.56

Previously using an RNAV model, we have transitioned to a DDM model. Incorporating a risk-free rate of 2.7% (versus 2.5% previously) into our model, our FV drops to S$1.56 from S$1.73. We maintain a HOLD rating on CDLHT.

2Q13 results miss street’s expectations

• 2Q13 SG hotels RevPAR down 8.5% YoY
• Boost from Angsana Velavaru acquisition
• Maintain HOLD

Misses street’s expectations

CDL Hospitality Trusts reported a 2.9% YoY decline in 2Q13 gross revenue to S$35.6m and a 4.4% YoY fall in net property income to S$32.6m. Income available for distribution contracted 6.4% YoY to S$29.4m. The results were in line with our expectations, with 1H13 DPU of 5.41 S cents forming 50% of our prior FY13 estimate. 2Q13 results missed the street’s expectations with 1H13 DPU forming only 47% of the mean FY13 estimate.

Weak quarter from SG as expected

The weak performance was chiefly due to lower gross revenue from the Singapore hotels, which was mitigated by a S$1.9m revenue boost from Angsana Velavaru (Maldives), which was acquired in Jan 2013. 2Q13 RevPAR for the Singapore hotels fell 8.5% YoY to S$193, affected by increased competition, weaker corporate demand, the absence of the biennial Food & Hotel Asia event in Apr, and a mild impact from the haze. Contribution from the Australian hotels in Brisbane and Perth was slightly lower YoY, affected by the slowing Australian economy and a weaker AUD.

Reducing FY13 RevPAR growth assumption

We understand from management that the performance of CDLHT’s Singapore hotels in July was still weak, although numbers a bit firmer for Aug and Sep. Our checks suggest a similar trend for the overall industry. However, we remain concerned about a mild oversupply situation, with expectations that hotel room supply will grow at 5.8% p.a. from 2013 to 2015, while room demand will only grow at 5.4% over the same period.

New FV of S$1.73

Estimating the financial effect of the planned closure of most of the Orchard Hotel Shopping Arcade for AEI (the Galleria will be kept open) from late 2013, and adjusting our assumptions for the non-Singapore hotels, our FY13F DPU falls to 10.4 S cents from 10.9 S cents. Incorporating a risk-free rate of 2.5% (versus 2.2% previously) into our model, our FV drops to S$1.73 from S$1.79. We maintain a HOLD rating on CDLHT.

Results Remain Weak

CDL Hospitality Trusts’ gross revenue and net property income for 2Q13 softened to SGD35.6m (-2.9% y-o-y) and SGD32.6m (-4.4% y-o-y) respectively. The quarter’s DPU of 2.72 cents (-6.8% y-o-y) was in line with estimates, but deviated by -1.5% from our forecast. Due to the persistently weak outlook for Singapore’s hospitality sector, we remain NEUTRAL on the stock, with a lower TP of SGD1.63.

Earnings soften due to corporate spending cuts, fewer events. CDL Hospitality Trusts (CDREIT)’s weak 2Q13 earnings were mainly attributed to softer demand for hotel space versus a year ago, as corporations continued to cut travel budgets amid uncertain global economic conditions. Stiffening competition in the hospitality industry resulting from the new supply of hotel rooms, together with the absence of the biennial Food & Hotel Asia event in April, dampened its hotels’ performance. This led to its 2Q13 revenue per available room (RevPAR) at its Singapore hotels declining 8.5% y-o-y to SGD193 (1H13 RevPAR: -8.1% y-o-y to SGD192).

Overseas income mitigates weaker earnings. Earnings at the group’s hotels in Australia also weakened as that country’s economy and mining sector turned sluggish. However, this was partly mitigated by the high proportion of fixed rent contributed by the group’s Australian properties. Meanwhile, its hotel in the Maldives, Angsana Velavaru, performed well, registering a RevPAR growth of 27.5% y-o-y.

Earnings to stay feeble in upcoming quarters. Given CDREIT’s relatively high reliance on corporate spending (c. 60%), we expect earnings to remain soft as companies tighten their budgets in the upcoming quarters. In addition, with an expected supply of more than 4,500 new hotel rooms in 2013, 1,600 rooms in 2014 and 3,506 in 2015, we expect the competition within the hospitality sector to intensify.

Maintain NEUTRAL, with a lower SGD1.63 TP. In view of the weakerthan-expected results, which were partially offset by Management’s efforts to keep its occupancy rate high (88% in 2Q13), we remain NEUTRAL on the stock, but with a slightly lower DDM-based (COE: 9.8%, TGR: 2.0%) TP of SGD1.63, as we trim our topline forecast by 9.8%.