• Industry data points still muted
• Raise FV on Crowne Plaza acquisition
• Cautious on near-term outlook

Tourist arrivals remain lacklustre

According to statistics released by the Singapore Tourism Board this week, international visitor arrivals remained weak for the month of Jan, with an overall dip of 7.0% YoY registered. In particular, visitor arrivals from North Asia and Southeast Asia, which are key markets for OUE Hospitality Trust (OUEHT), saw declines of 12.0% and 9.9% YoY to 337.8k and 448.0k, respectively. However, there were some bright spots for the sector, as average occupancy rates rose 1.9 ppt to 83.1%, while RevPAR inched up 1.4% YoY to S$207.3 in Jan this year.

Crowne Plaza acquisition to provide inorganic growth

In a bid to reduce its concentration risks in the Orchard Road precinct and to capture the longterm growth prospects of Singapore’s hospitality sector, OUEHT recently completed the acquisition of Crowne Plaza Changi Airport Hotel (CPCA) from its sponsor for S$290m. It will also purchase the Crowne Plaza extension (CPEX) for S$205m upon the completion of its construction, which we expect to occur in end 2015. We are positive on this development as we estimate that it would be DPU accretive to OUEHT’s unitholders. CPCA would be acquired using debt, at a cost of borrowing of ~3%. We assume CPEX to be financed by both debt and equity on a 50%-50% ratio. Other positive elements of this transaction include downside revenue protection for the master lease and close proximity to Changi Airport’s rejuvenation projects. Although we project OUEHT’s gearing ratio to increase to 41.9% in FY15 and 42.5% in FY16, this is still within management’s comfortable gearing ratio. As at 31 Dec 2014, 100% of OUEHT’s debt has been hedged. We expect management to seek new hedges on the fresh borrowings drawn down to finance the CPCA acquisition.

Raise FV but maintain HOLD

We raise our DDM-derived fair value from S$0.85 to S$0.94, as we input this acquisition in our model, and also roll forward our valuations. Although OUEHT offers an attractive FY15F and FY16F distribution yield of 7.5% and 8.0%, respectively, we remain cautious on the nearterm outlook of the hospitality sector. As such, we are keeping our HOLD rating on the stock intact.

Source: OCBC Research - 19 Mar 2015