Weaker 3Q12 but results inline with expectations. CDL Hospitality Trust (CDL-HT) reported 3Q12 DPU of 2.72S'' (-1.8% YoY) equivalent to 23.0% of our FY12 DPU estimate. Gross revenue and NPI for the period came in at S$36.1m (-0.8% YoY) and S$33.6m (-1.1% YoY). The drop in earnings were mainly attributed to slightly lower RevPAR (-0.9% YoY) as a result of weaker macroeconomic environment impacting Singapore's economy and hospitality sector. In addition, the fixed rent contribution from the Australia Hotels in 3Q12 was also slightly lower than a year ago on the back of foreign exchange losses arising from a weaker Australia dollar. Going forward, we expect CDL-HT's earnings to continue to remain suppressed as the higher earnings from the upcoming festive season might be dampen by the cut in corporate spending as the global economy continues to be plagued by uncertainty. However, having said that, given a low gearing of 25.5%, CDL-HT is currently actively sourcing for acquisition opportunities in the hospitality sector to expand their portfolio. Given a weaker hospitality market coupled with prolonged uncertainty in the global market, we are currently less optimistic in this sector than a quarter ago and have downgraded our call on CDL-HT to Neutral with a lowered DDM based (COE: 9.2%, terminal growth: 2.0%) TP of S$2.00

Weaker quarter as a result of cut in corporate spending. During 3Q12, CDL-HT experienced lower revenue and NPI as a result of corporate cutting spending, a weaker hospitality sector and foreign exchange losses arising from a weaker Australian dollar. Management indicated that the number of meetings and conferences held during this period were affected by the economic uncertainty. Although ARR held firm at S$236, occupancy for the period fell to 88.6% (-0.9% YoY), leading to a fall in RevPAR by 0.9% to S$209.

Much headroom for future acquisition. With a low gearing ratio of 25.5% and an internal maximum gearing rate of 40% there is much room for CDLHT to undertake more debt for future acquisitions. Currently, management indicated that they are actively seeking for possible acquisitions in the hospitality sector in the next 12 months.

Downgraded to Neutral with lowered TP of S$2.00. Going forward, as we step into the traditional peak season for hospitality, we believe CDL-HT will deliver a stronger 4Q. However, this rise in earnings is likely to be dampened as the global market continues to remain uncertain. Given a weaker hospitality sector outlook, we have downgraded our call on CDL-HT to Neutral with a lowered TP of S$2.00.

Key risks. CDLHT's heavy reliance on corporate visitors (currently accounts for approximately 65% of the hotels' businesses) is one of the key risks to this counter. If the global economy in 2012 continues to soften, companies might cut down on corporate travel which would in turn lead to a decrease in demand for hotel rooms in Singapore. In addition, if the global economy enters into an economic crisis; as per the Lehman crisis in 2008, both the ARR and RevPAR will be adversely affected. This paradigm was observed in 2009 when both ARR and RevPAR fall by 22.7% and 27.6% respectively after the collapse of Lehman in 2008.

 

 

Source: OSK