• BUY, new SGD1.78 Target Price from SGD1.79, 9% upside with 6% FY20F yield.
• CDL HOSPITALITY TRUSTS (SGX:J85) remains our preferred hospitality pick. 3Q19/9M19 results were slightly below our estimates, due to the weaker performance of its overseas properties. On the positive side, its Singapore hotels registered the strongest RevPAR growth in 3Q19 since 2012, and this trend is expected to continue.
• Valuations are reasonably attractive, at 1.1x P/BV. This stock is still one of the most liquid proxies to Singapore’s hospitality sector.

Singapore: Good RevPAR Growth; Positive 2020F Outlook

• CDL Hospitality Trusts's 3Q19 revenue per available room (RevPAR) grew 4.9% y-o-y, marking the biggest jump in the last seven years – largely driven by higher room rates. Management noted that despite the weak corporate environment, strong demand for leisure more than compensated for the weakness. See CDL Hospitality Trust Announcements.
• The completion of asset enhancement works at Orchard Hotel also helped in boosting RevPAR, with strong demand seen for refurbished products.
• For the first 27 days in October, RevPAR for its Singapore hotels rose by 0.2% y-o-y. In 2020, market conditions should be more favourable, with minimal supply (~1%) and a healthy demand pipeline on the back of a strong event calendar.
• Management guided that 2-3% RevPAR growth for 2020 should be achievable, barring unforeseen circumstances.

Overseas: a Disappointing Quarter; Hit by Weaker Market Conditions and Fluctuating FX

• Overseas NPI contributions declined across all countries, being impacted by decelerating demand on top of higher supply and unfavourable FX rate fluctuations.
• Raffles Maldives Meradhoo was fully opened in September after undergoing a major renovation and rebranding exercise, but management expects a 1-2 year gestation period for the asset before it starts contributing meaningfully to total numbers. Asset enhancements for Angsana Velavaru in the Maldives are expected to be completed by end- 2019.
• In terms of outlook, CDL Hospitality Trusts’s Germany and Italy hotels are expected to book a better operational performance, while weakness is expected to persist in its New Zealand, Japan, UK and Maldives assets.

Acquisitions Likely a Potential Catalyst in the Near Term

• Management is actively looking out for assets to acquire, with Singapore and Europe being the preferred markets. In Singapore, we believe M Social Hotel from its sponsor could be a potential candidate for acquisition in the near term. For Europe, the attractive yield spreads (yields minus borrowing cost) remain the key draw.
• Asset enhancement works are currently being carried out at Copthorne Kings Hotel in Singapore and The Lowry Hotel in the UK, with minimal disruption expected to operations.
• Gearing stands at a modest 36.3%, and we expect potential acquisitions to be funded via a combination of debt and equity.

DP and Target Price Adjustments

• Our FY19F-21F DPU is lowered by 1-3%, after imputing the anticipated prolonged weakness in its Maldives properties and lower contributions from its New Zealand assets. See CDL Hospitality Trust Share Price; CDL Hospitality Trust Target Price; CDL Hospitality Trust Dividend History.
• See also SGX Market Update: SIA, ComfortDelGro, CDL Hospitality Joined FTSE Value-Stocks ASEAN Index.

Source: RHB Invest Research - 31 Oct 2019