Valuation looks appealing. CDHLT has corrected 14% ever since Bernanke’s congressional testimony on 22 May. At this price, we think previous concerns on hotels oversupply and RevPAR declines are overdone. CDLHT is currently trading at ~400 bps yield-spreads vis-à-vis average/median historic spread of 294 bps. Adding the most hawkish FY13 risk-free rate of 3% gives a hypothetical DPU yield of 5.9%. The counter is presently trading at a yield of 6.9% and is 100bps under-priced in our view. We upgrade CDLHT to BUY with a TP of SGD1.90.

Slower tourism growth but supply can be absorbed. According to CBRE, a total of 12,092 new rooms from known projects will be coming onboard between 2013-2016. This constitutes ~23% of available stock. Nonetheless, we expect tourist arrivals to register 4.5% CAGR over 2012- 2016 but hotel room supply (measured in terms of available room nights) will grow at 3.9% CAGR, lagging demand growth of 4.2%. RevPAR growth is projected to slow from 4% in 2012 to -1% this year and 2%-7% over 2014-2016. We keep our visitor arrivals forecast intact with 15m and 16.4m arrivals in 2013 and 2015 respectively (behind STB’s target of 17m arrivals in 2015 – one of the most conservative on the street).

Lackluster results to pass. CDLHT’s 1Q13 results were negatively affected by the absence of the bi-annual Singapore Airshow. The corporate travel momentum, which usually picks up in February after the year-end holiday season, was also disrupted due to Chinese New Year falling in the middle of February this year as compared to January last year. We expect a slight dent in 2Q13 results following the haze, which rose to hazardous levels on two working days. Nonetheless, 2H13 results, which is seasonally the better half, should start reflecting positives over 1H13. With 3,705 new hotel rooms completed this year, we expect CDLHT’s SG hotel occupancy (excl. Studio M Hotel) to drop to 87% in 2013 from 89% in 2012 and RevPAR to fall to SGD208 from SGD211 last year. However, RevPAR will pick-up progressively over 2014-2016 at 4% CAGR, spurred by increasing visitor arrivals.

Inorganic-Growth Catalyst. With a low gearing of 28.3%, CDREIT has a debt headroom of SGD430m before hitting 40% gearing. We estimate that a 50bps rise in interest rate will have a 1.5% impact on DPU. We think there should be opportunities for sponsor injection from Asia, with M&C Hotels plc operating another 10 Asian hotels (Figure 1) in major cities such as Seoul, Beijing etc. Further yield-accretive acquisitions will be catalyst for the counter, dovetailing neatly with the impending SGD25m assetenhancement initiative at Orchard Hotel Shopping Arcade. Renovation works will comprise an overhaul of the property facade and existing amenities to enhance its user-friendliness, with an increase in NLA of 10k sqft. The AEI is scheduled to commence in late 2013 and complete in end- 2014, contributing more than SGD2m incremental rental income per annum with an ROI of more than 8%.

Source: Maybank Kim Eng Research - 28 Jun 2013