• CDL HOSPITALITY TRUSTS (SGX:J85)’s 1H19 DPU is in line with expectations, at 48.8% of our full-year estimate.
• Management sees a better 2H19 for its Singapore portfolio (with higher retail rates), aided by limited future supply growth. New Zealand and Maldives properties continue to be affected by new supply although demand outlook is healthy. UK portfolio remains resilient despite Brexit concerns.
• Maintain BUY and target price of S$2.06.

2q19 Results

Results came in line with expectations.

• CDL HOSPITALITY TRUSTS (SGX:J85) reported 2Q19 DPU of 2.07 S cents (-3.3% y-o-y), bringing 1H19 DPU to 4.16 S cents (-3.5% y-o-y) which forms 48.8% of our full-year forecast.
• 2Q19 gross revenue declined marginally (-0.5% y-o-y), dragged by the closure of Raffles Maldives Meradhoo and lower contributions from Singapore, New Zealand and Australia hotels, although this was partly offset by a full-quarter inorganic contribution from Hotel Cerretani Florence (S$1.1m), and higher contributions from Munich and UK hotels.

Stock Impact

Singapore portfolio to see gradual improvement.

• In 2Q19, Singapore RevPAR declined 1.7% y-o-y, affected by softer demand and refurbishment works. Demand was weaker due to economic uncertainty, regional elections, absence of the biennial Food&HotelAsia event, as well as disruptions (from the ongoing refurbishment at Orchard Hotel and upgrading works at two other hotels). If out-of-order room inventory were excluded, RevPAR would have increased 1.3% y-o-y, reflecting the resilience of the assets.
• Management sees gradual improvement for 2H19, aided by higher retail rates (corporates already locked into RFPs).

More AEIs plans being evaluated.

• The Orchard Hotel rejuvenation (covering lobby, F&B outlets, all meeting spaces and Orchard Wing) are mostly completed. All 260 bedrooms in Orchard Wing have been refurbished, and the remaining 65 Club Floor Rooms are set to complete in 3Q19.

Healthy demand-supply dynamics for Singapore hotels going forward.

• Singapore hotel inventory is expected to increase by 1,703 net rooms in 2019 (of which 430 are in the city centre), representing 2.5% of existing room stock. In the medium term, supply growth is also benign at 1.3% CAGR from end-18 to end-22 (vs 5.5% CAGR in 2014-17).
• Management highlighted several demand drivers, such as Singapore’s future MICE pipeline with 2020 seeing a number of inaugural events, like 103rd Lions Clubs International Convention (20,000 foreign attendees), inaugural Asian edition of gamescom, the largest international gaming festival (30,000 attendees), as well as growing flight connectivity, with the opening of T5 by 2030 (ie which will double capacity to 150m passengers p.a.).
• For ytd May 19, visitor arrivals to Singapore have grown by 1.5% y-o-y to 7.8m. Seven of the top 10 source markets also recorded growth. With an increase in ALOS in Singapore, total visitor days have grown 2.5% y-o-y.

New Zealand portfolio affected by new supply.

• As a result of increased competition, RevPAR of Grand Millennium Auckland dipped 1.4% y-o-y although demand outlook remained healthy.

UK portfolio: Resilient showing despite Brexit uncertainty.

• UK properties recorded RevPAR improvement of 1.6% y-o-y in 2Q19. For Hilton Cambridge City Centre, performance was affected by price competition from new entrants in Cambridge. For The Lowry Hotel, sporting events (Cricket World Cup) boosted RevPAR growth.

Maldives market: Healthy demand outlook despite competitive market.

• Inbound flights from the Middle East have been growing amid the government increasing its 2019 state budget for tourism promotion by about three times. Supported by the healthy tourist arrivals, Angsana Velavaru has also adopted a volume-centric strategy, boosting its RevPAR by 13.9% y-o-y.
• Angsana Velavaru has also commenced on some enhancement works (including the addition of a main public pool, full renovation of 79 land villas), majority of which are expected to complete at the end of this year. Raffles Maldives Meradhoo is expected to fully open later this year and is expected to see sub-optimal performance during the gestation period.

Update on continental Europe.

• Pullman Hotel Munich saw a 9.6% y-o-y RevPAR growth, aided healthy events calender (including a large triennial trade fair), as well as growing visitor arrivals (7.5% y-o-y for 5M19).
• Hotel Cerretani Florence also achieved strong RevPAR growth of 5.1%, through a strong revenue management focus.

Appetite for more acquisitions.

• Gearing was maintained at 35.2% (flat q-o-q), with ample debt headroom estimated at S$524m. 2Q19 borrowing costs also remained stable at 2.4% (flat q-o-q).
• Management noted a preference on increasing their Singapore representation if assets are available at the right price. They have also flagged Europe (Germany, Netherlands and Spain) as focus destinations for acquisitions due to the low funding cost. For UK, however, management would be more selective due to Brexit concerns.

Valuation / Recommendation

• Maintain BUY and target price of S$2.06, based on DDM (required rate of return: 6.8%, terminal growth: 2.0%).

Share Price Catalyst

• Positive newsflow on hotel room rates and occupancy and tourist arrivals.

Source: UOB Kay Hian Research - 31 Jul 2019