NEUTRAL, new SGD1.25 TP from SGD1.15, 9% downside, 5% FY23F yield. CDL Hospitality Trusts’ strong 2H22 results were in line with expectations. Its outlook is moderated by a mix of slowing economic growth and inflationary pressures, but positive surprise could come from a strong rebound in Chinese tourist arrivals. This, however, is mostly priced in (share price has risen 25% in the last three months), and the stock is trading at levels close to its BV. It is also most exposed to rising interest rates, due to low hedges and half its debts expiring in 2023-2024.
2H22 operational DPU grew 75% YoY, on a 48% YoY growth in NPI, with six of its eight operating markets recording healthy improvements. 13 of its 17 hotels outperformed pre-pandemic RevPAR in 4Q22 (vs 4Q19). Portfolio value (on a same-store basis) rose 4.8%YoY, driven by a 9% valuation jump in Singapore assets. While cap rates rose marginally (0-50bps) across markets, the effect was offset by the stronger performance and growth outlook. No capital top-ups were made for FY22 (vs SGD12.5m in FY21) and the guidance is for no additional capital top-ups this year.
Positive outlook with Singapore expected to lead the recovery…driven by a healthy pipeline of meetings, incentives, conferences and exhibitions (MICE) events and an anticipated sharp recovery in Chinese tourists later this year. Other markets in its portfolio that could benefit from the recovery in China tourist arrivals include the Maldives, Japan, and New Zealand. Headwinds, on the other hand, include labour shortages and cost pressures – which management expects will ease, as the year progresses.
…but interest cost pressures may limit gains. Only 56% of CDLHT’s debt is on fixed interest rates, and this is among the lowest among the S- REITs. Every 100bps increase in its interest cost could shave DPU by SGD0.0086 (18% of FY22). In addition, it has 22% and 28% of debt expiring in FY23 and FY24, which we expect to be rolled over at interest rates of slightly above 4%. Overall interest costs, as a result, should come in at high 3% levels, vs 3.5% as of end Dec 2022.
Acquisitions likely in overseas markets. CDLHT’s gearing fell to 36.6% (FY21: 39.1%) on the back of the valuation increase. It could also tap-in equity on the back of the recent share price run-up. Management noted that potential acquisition opportunities are mostly overseas (the UK, Japan etc) with over-leveraged buyers likely to offload. An asset enhancement exercise is currently underway at Grand Copthorne Waterfront, with extensive rejuvenation works on all rooms and meeting facilities.
We fine-tune FY23-24F DPU by 1% and -3% after factoring in rising interest cost expenses. Its ESG score of 3.1 is a notch above the country median, so we applied a 2% premium to intrinsic value to derive our TP.
