• Maintain NEUTRAL with lower DDM-derived TP of SGD1.15 from SGD1.30, 3% upside. CDL Hospitality Trusts’ strong 3Q results were in line with market expectations, boosted by a surge in pent-up travel demand across its key markets. Near-term outlook remains positive but challenges are emerging from inflationary pressures on cost and travel demand, rising interest costs and FX impact. Its high gearing and proportion of debt expiry (c.39%) also puts it in a relatively vulnerable position compared to its peers.

• Net property income (NPI) in 3Q/9M jumps 54%/44% YoY driven by a broad based recovery across markets barring New Zealand which is still ramping up post COVID-19. Singapore was the star performer with YTD NPI surging 92% YoY on the back of strong pent-up demand and return of events. CDLHT saw revenue per available room (RevPAR) exceeding the level from 3Q19 on 12 of its 18 hotels as border restrictions eased significantly. YTD NPI margin was down 1.5ppt at 53%.

• Singapore driving the recovery with NPI (3Q) from its five hotels 5% higher than the level in 3Q19. One of its Singapore hotels is still contracted under Government for isolation purposes. Singapore was one of the first South-East Asian nations to relax border measures as well as return of high profile meetings, incentives, conferences, and exhibitions (MICE) events and Formula One races which drew record attendance.

• Portfolio in Europe and the UK saw a strong rebound on the back of pent-up demand. While Maldives saw YoY RevPAR increase, inflationary cost pressures have started to bite resulting in higher NPI loss in 3Q. Portfolio outlook in Maldives and Europe is also impacted by the Russo- Ukraine war, resulting in high inflation and weak economic outlook. On the other hand, New Zealand and Japan are expected to see improvements in coming quarters with more events and easing of restrictions.

• Key risks: Interest cost and FX. CDLHT has a high proportion of debt: 18%/21% (c.SGD426m) due for refinancing in 4Q22-2023, which is likely to be refinanced at 150-250bps higher than current average interest cost of 2.5% and c.64% of its debt is currently fixed. This is on the lower side compared to peers and the proportion is likely to be further lowered post refinancing. About 20% of its 3Q NPI is derived in GBP, JPY, and EUR which have depreciated significantly since the start of the year.

• We lower FY23-24F DPU 5% by adjusting RevPAR assumptions factoring in higher interest costs and slightly lower margins. We also raise our COE assumptions by 50bps on the back of higher interest rates.

• We raise our ESG score by a notch to 3.1 (out of 4.0) on the back of more tangible green initiatives. As this score is one notch above country median score, we have now applied a 2% ESG premium.

Source: RHB Research - 31 Oct 2022