2Q15: CDL Hospitality (Below Expectations), Frasers Hospitality (Above Expectations) Starhill Global (In Line With Expectations).
- Maintain BUY on CDREIT with a reduced target price of S$1.90, factoring in the weaker-than-expected outlook for the hospitality segment. Management is eyeing possible foreign expansion in Japan as the domestic outlook remains bleak.
- Maintain BUY with an unchanged target price S$1.02 for FHT. Properties in Japan, Australia and the UK are expect1ed to continue their outperformance, while Singapore and Malaysia will see softer performance.
- Maintain BUY on SGREIT with an unchanged target price of S$0.96.
- Maintain MARKET WEIGHT on the sector.
WHATโS NEW
- CDL Hospitality Trust (CDREIT), Frasers Hospitality Trust (FHT) and Starhill Global REIT (SGREIT) reported their quarterly results.
ACTION
CDL Hospitality Trust (CDREIT SP/BUY/ S$1.63/Target: S$1.90)
โข Results below expectations
- Results below expectations with 2Q15 DPU down 10.0%, below our and consensus expectations at 44.3% of 1H15 estimates on higher interest costs and weaker performance from Singapore. Interest costs ballooned by a surprising 49.5% in the quarter, due to the Japanese acquisitions which were wholly debt-funded as well as refinancing of short-term borrowings.
โข Operational highlights.
- Occupancy among CDREITโs Singapore hotel portfolio saw a 1.2ppt decline to reach 86.5% in the latest quarter.
- Gearing on the other hand dipped 0.3ppt to hit 32.0% in 2Q15.
- Borrowing costs remained flat at 2.7% during the quarter.
- Japan Hotels saw RevPar leap 29.1% as visitor arrivals in Japan surged 46% yoy to reach 9.1m arrivals ytd June.
- This was attributed to a weaker yen and tourism-friendly initiatives like visa exemptions.
- As of 31 December, 67 countries and regions have been exempted from visa requirements, according to the Japanโs Ministry of Foreign Affairs.
- Distributions from Japan will likely come in 4Q15, however, due to compliance with TMK rules.
โข Tourist arrivals in May brought some cheer,
- Tourist arrivals in May brought some cheer, with a 1.1% yoy increase in visitor arrivals marking the first positive growth in 16 months (since Feb 14).
- Chinese arrivals have gone from strength to strength since April this year, catapulting 47.1% yoy in May, showing increasing signs of stabilisation.
- Overall, Singaporeโs tourism registered a 4.1% decline ytd May, attributable to the ongoing decline in Indonesian tourists as the rupiah declined approximately 6% in the same period.
- We expect to see a certain degree of stabilisation in RevPAR in 2H15 due to the positive spillover effects surrounding the SG50 celebration, coupled with the recent weakening of the SGD to IDR.
โข Further supply-side bruising for Singaporeโs hospitality scene, though management remains unruffled.
- The hospitality sector is set to expand 7.7% in 2H15, adding some 4,405 rooms before the year is out.
- We are somewhat heartened to note that upscale/luxury rooms make up only 6.1% of incoming supply due to hit the market.
- The Singapore Tourism Board (STB) had earlier revised the visitor arrival growth forecast for 2015 to 0-3%.
โข Looking out for acquisitions in Japan.
- With debt headroom of S$322.3m assuming gearing limit of 40%, significant scope exists for overseas expansion.
- Management remains on the active lookout for acquisitions in its preferred target market Japan, being partial to assets on leases that provide greater profit sharing through variable rent.
- Acquisitions in Singapore, Maldives and Dubai have not been ruled out however.
โข Maintain BUY
- Maintain BUY with a reduced target price of S$1.90/share based on two-stage dividend discount model (required rate of return: 7.8% and terminal growth rate: 2%).
- We have reduced FY15, FY16, FY17 DPU estimates by 4.1%, 3.0% and 2.9% respectively, taking into account the confluence of a supply overhang and demand-side malaise plaguing the hospitality sector.
Source: http://research.uobkayhian.com/
