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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 21 Feb 2019, 04:09 PM

 

OUE Hospitality Trust - in Transition to a Higher Plane

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  • OUEHT’s 4Q18 DPU of 1.28 Scts (+0.8% y-o-y) in line with expectations. 
  • Better results due to lower interest expense and higher retail contribution. 
  • 4Q18 RevPAR for Mandarin Orchard and Crowne Plaza up 1.6% and 2.1% y-o-y respectively. 
  • But Mandarin Orchard earnings hit by lower banquet sales and Crowne Plaza still below minimum rent level. 

Attractive Valuations

  • We reiterate our BUY call on OUE HOSPITALITY TRUST (SGX:SK7, OUEHT) with a Target Price of S$0.85. We believe FY18- FY19 are transition years with flattish DPU given the loss of income support, impact from higher borrowing costs, and Crown Plaza Changi Airport still taking time to ramp up. This combined with fears over a rights issue similar to that done by its sister REIT, OUE COMMERCIAL REIT (SGX:TS0U), caused OUEHT’s share price to correct over the last 6-9 months. However, we believe these issues are largely priced in as OUEHT currently trades at 0.9x P/Bk which is in line with -1SD of its mean P/Bk, and its forward yield of 7.2% is also close to +0.5SD of its mean yield of 7.4%.
  • Where we differ – Premium to book valuation. Between 4Q17 and early 2018, the market came around to our view that OUEHT should trade at a premium to book, given its leverage to a multi-year recovery in the Singapore hospitality market given limited new supply and premium prices paid for hotels.
  • However, the correction in 2H18 partially offset by the rally in January now places OUEHT at 10% discount to book. As we believe we are in the midst of a multi-year recovery, OUEHT should re-rate from the current level. We look back to the 2010-2011 period where comparable peer CDL HOSPITALITY TRUSTS (SGX:J85) traded up to 1.5x P/B during an upswing and see the potential for OUEHT to trade up to 1.1x P/B as implied by our Target Price.
  • Upside from acquisitions. While OUEHT’s high yield makes it difficult to find accretive deals, we believe an inorganic strategy remains a key share price driver. Beyond its Sponsor’s assets, OUEHT is seeking opportunities in Europe, US and Japan.

Valuation

  • We maintain our DCF-based Target Price of S$0.85. With 22% capital upside we reiterate our BUY call.

Key Risks to Our View

  • The key risk to our view is a weaker-than-expected outlook for the Singapore hospitality and retail market.

What’s New

Decent End to the Year

4Q18 DPU of 1.28 Scts (+0.8% y-o-y)

  • OUEHT reported 4Q18 DPU of 1.28 Scts, 0.8% y-o-y higher largely due to lower interest expense, higher retail contribution partially offset by lower earnings from the hotel portfolio.
  • For FY18, DPU came in at 4.99 Scts which was largely within expectations. The decline was mainly attributed to the loss of income support for Crown Plaza Changi Airport (CPCA) which ended in 3Q17.
  • Turning back to 4Q18, revenue fell 2.2% y-o-y as the trust was impacted by lower F&B revenue at Mandarin Orchard Singapore (MOS) and lower passing rents at Mandarin Gallery. However, 4Q18 NPI fell a more modest 1% y-o-y owing largely to 6.5% y-o-y jump in NPI for Mandarin Galley.

Recovery in hotel RevPAR offset by lower banquet sales

  • Following the y-o-y declines in revenue per available room (RevPAR) in 2Q18 and 3Q18, 4Q18 RevPAR for MOS increased by 1.6% y-o-y to S$229. We understand this was largely led by an improvement in occupancy owing to better demand from both the transient and corporate segments.
  • Despite room revenue increasing, 4Q18 revenue and NPI for MOS fell 3.3% and 2.4% y-o-y to S$18.9m and $18.3m respectively. MOS was impacted by lower banquet sales following the closure of the Grand Ballroom which has since been reopened in January.
  • Meanwhile, CPCA continues to ramp up with 4Q18 RevPAR increasing 2.1% y-o-y to S$180. However, as income for the property has not exceeded S$22.5m, OUEHT only collects the minimum rent of S$22.5m.

Pressure on rents at Mandarin Gallery still present but earnings buffered by lower costs

  • On the back of the softer retail environment and prior negative rental reversions, passing rent for Mandarin Gallery fell to S$22.20 psf/mth from S$22.80 psf/mth in 4Q17. This caused 4Q18 revenue to fall 0.9% y-o-y to S$8.5m despite committed occupancy increasing to 99.1% from 96.9% in 4Q17 and 96.8% in 3Q18.
  • Nevertheless, on the back of lower operating costs, 4Q18 NPI for Mandarin Gallery jumped 6.5% y-o-y.
  • Pressure on earnings for the property is likely to persist with leases renewed over 4Q18 resulting in 8.9% negative rental reversions.
  • In FY19, another 11% of leases are up for renewal with risk that negative rental reversions could continue if the retail market in Orchard does not improve.

Stable capital structure

  • Gearing remained relatively stable at 38.8% as there was no change in valuations for OUEHT’s properties at year end. We understand valuers have applied a cap rate of 5.0%, 5.3% and 5.0% for MOS, Mandarin Gallery and CPCA respectively.
  • NAV per unit stands at S$0.75.
  • Average borrowing cost inched up to 2.5% from 2.4% in 3Q18 but was flat y-o-y.
  • Meanwhile, the proportion of fixed rate debt remains around 71% with no refinancing due until December 2020.

Flattish DPU profile in FY19

  • Post-results, we raised our FY19-20F DPU by 1% after minor tweaks to our borrowing costs and non-cash estimates.
  • Despite slightly higher DPU forecast, we believe FY18-FY19 remains a transition period for OUEHT with a flattish DPU profile despite 3% RevPAR growth for MOS. This is due to the additional shares on issue but also modest contribution from Mandarin Gallery owing to still soft passing rents, higher anticipated borrowing expenses (we have assumed effective borrowing costs increases by 20bps) and CPCA still largely reliant on the minimum rent.
  • Better prospects for DPU in FY20, where we forecast a 2% increase as CPCA continues to ramp up resulting in variable income being received and MOS continues to record 3-4% y-o-y improvement in RevPAR.

Maintain BUY, Target Price of S$0.85

  • With 4Q18 results in line with expectations, we maintain our BUY call and Target Price of S$0.85.
  • While near term DPU is projected to be flattish, OUEHT’s valuations are attractive at 10% discount to book and forward yield of 7.2% which is close to +0.5SD of its mean yield of 7.4%.

Source: DBS Research - 30 Jan 2019

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