Set for a Turnaround, Top Sector Pick

• We prefer hospitality plays with stronger growth prospects. CDL Hospitality Trusts (CDLHT)’s scale and liquidity makes it a good proxy to a sustained recovery in Singapore’s hospitality sector. Meanwhile, its overseas expansion has gained traction, with a push into Europe continuing to be supported by a positive carry from low funding cost. 
• Low gearing of 33.2% and an estimated SGD600m in debt headroom suggests upside from DPU-accretive deals. 
• We initiate at BUY with our DDM-based SGD1.80 Target Price (COE: 7.4%, LTG: 2.0%), suggesting 24% total return.

Stronger Growth in SG in 2H

CDL Hospitality Trusts (CDLHT)’s Singapore hotels, at 55% of FY18 NPI are well-placed for a rebound in leisure tourism and recovery in corporate demand. 

RevPAR was flat y-o-y in 2Q18 due to competition from new supply and weak corporate demand during the Trump-Kim Summit and public holiday timings. CDL Hospitality Trusts’ business-focused portfolio is positioned for a stronger 2H 2018, with a 7.6% y-o-y year–to-Jun arrival growth tracking ahead of projections and a stronger MICE event calendar with a boost from major trade shows this year. 

The tapering of supply should support upside from yield management efforts.

Overseas Expansion DPU Driver and Gaining Traction

• CDL Hospitality Trusts (CDLHT) was amongst the first S-REITs to expand globally - to New Zealand (in 2006) and Australia (2010), and has executed reasonably well on its diversification.

Undemanding at 6.4% Yield, 4% DPU CAGR

CDL Hospitality Trusts (CDLHT)’s DPU yield is currently at its 12-year mean of 6.4% but we expect its spread with the SG 10-year government bond to narrow as RevPAR growth picks up. 

We see improving occupancies and RevPARs as near- term catalysts. CDLHT’s scale and liquidity will continue to position it as the best proxy to stronger Singapore hospitality sector fundamentals.

Swing Factors 

Upside 

• Earlier-than-expected pick-up in corporate demand driving improvement in occupancy. 
• Better-than-anticipated RevPAR trends. 
• Accretive acquisitions where cap rates exceed cost of funds, or divestments at low cap rates which unlock asset values. 

Downside 

• Sizeable increases in hotel room supply without commensurate growth in demand. 
• Deterioration in global macro outlook resulting in decline in RevPARs. 
• Significant volatility in foreign exchange rates could impede hedging efforts and impact DPU estimates. 
• Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations. 

Source: Maybank Kim Eng Research - 14 Sep 2018