Analysts are mixed on CDL Hospitality Trusts (CDLHT) J85 despite the REIT seeing an 86% y-o-y increase in revenue per available room (RevPAR) for 1QFY2023 ended March.
Jonathan Koh of UOB Kay Hian Research has maintained his “buy” call for CDLHT, with a higher target price of $1.55 from $1.47 previously, while Natalie Ong and Lock Mun Yee of CGS-CIMB Research kept their “add” recommendation with an unchanged target price of $1.58. Maybank Securities' Krishna Guha has also kept his "buy" call with an unchanged target price of $1.40.
However, Citi Research’s Brandon Lee has reiterated his “sell” rating on CDLHT with an unchanged target price of $1.15, citing Far East Hospitality Trust (FEHT) as a “better proxy”, given its 100% domestic exposure.
For 1QFY2023, CDLHT saw total revenue and net property income (NPI) grow 31.5% and 35.0% y-o-y respectively to $60.8 million and $32.7 million for 1QFY2023.
RevPAR also grew across most markets, coming in at $176 or 8% above pre-pandemic levels, with occupancy improving 13.5% points y-o-y to 67.9% and room rates increasing 49% y-o-y to $259.
According to UOB Kay Hian’s Koh, this “stellar performance” was achieved despite the disruption at the Grand Copthorne Waterfront during the period, which saw room nights for the 549-room hotel reduced by 14,000 or 28% due to ongoing refurbishments.
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Ong and Lock of CGS-CIMB note that renovation of all 549 rooms, which was 59% complete as at March, and meeting facilities at the Grand Copthorne Waterfront is expected to be completed by June and July, respectively.
“We think the refreshed room offering should enable it to command higher rates while the meeting facilities would be in a better place to compete for conference business post refurbishment, in our view,” write the analysts.
Meanwhile, CDLHT’s Australian portfolio saw a turnaround driven by Western Australian state borders reopening, with its two Perth hotels increasing RevPAR by 273% y-o-y to A$122, 29% above pre-pandemic levels.
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In the UK, newly-acquired Hotel Brooklyn had a full-quarter contribution with NPI of $1.0 million as RevPAR increased 21% to £104, 2% below pre-pandemic levels.
UOB Kay Hian’s Koh expects CDLHT to benefit from the continued recovery in Singapore, Australia, New Zealand and Japan, and has raised his FY2023 distribution per unit (DPU) forecast by 3% due to the continued recovery in average daily rent (ADR).
His increased TP of $1.55 is based on a dividend discount model (DDM) which features a cost of equity (COE) of 7.25% and a terminal growth rate of 2.8%.
The CGS-CIMB analysts add that they expect a stronger 2HFY2023 performance from Australia, Singapore, Japan and the Maldives on the back of the return of Chinese tourists as borders fully reopen and Covid test requirements for Chinese travellers are removed.
They note that CDLHT’s balance sheet remains healthy, with its average all-in cost of debt increasing q-o-q from 3.5% to 3.8% while its adjusted interest coverage ratio slipped slightly from 3.7x to 3.5x.
About 55.5% of the REIT’s borrowings are on fixed rates with 18.3% of borrowings up for refinancing in FY2024. Based on current interest rates, CDLHT expects the cost of debt for FY2024 to land at around 4%.
“Meanwhile, gearing is expected to inch up slightly from 37.5% as at 1QFY2023 as loans are drawn down to fund the remaining £37 million in construction cost for The Castings, which is slated for completion in 3QFY2024,” add Ong and Lock.
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They have kept their FY2023 to FY2025 estimates with an unchanged DDM-based TP of $1.58.
Maybank's Guha likes CDLHT's healthy operating performance for the 1QFY2023 as it confirms the "sustained" tailwinds in global travel.
"We expect the group’s hotel portfolio to benefit from the next phase of recovery, led by Chinese tourists, albeit with some offset from higher borrowing and operating costs and adverse foreign exchange (forex) movements. We tweak our forecasts to reflect these trends, but maintain 'buy' on [the] back of [CDLHT's] 5.6% yield and strong DPU growth of 25.4%," he says.
Guha has raised his FY2023 revenue forecasts but factored in a slightly lower margin and higher funding cost assumption. All these have resulted in an unchanged DPU estimate for FY2023 although Guha's FY2024 DPU estimate has seen a 3% cut.
Meanwhile, Citi’s Koh acknowledges that CDLHT’s core Singapore market rebounded strongly in 1QFY2023 and with a full tourism recovery expected in FY2024, he is less positive on some of the REIT’s foreign holdings.
According to him, CDLHT's earnings recovery is likely to be impacted by rising debt cost and weaker foreign currencies. The REIT has also underperformed by 2% year-to-date (ytd) compared to S-REITs, with current valuations appearing to have priced in most of its recovery.
He notes that RevPAR for New Zealand fell 6% to NZ$164, as compared to 1QFY2022 when the hotel operated as a managed isolation facility with guaranteed occupancy and income. The Maldives’ RevPAR also fell 11% y-o-y to US$463 mainly due to increase in supply and reopening of alternative destinations.
On a q-o-q basis, Koh says that CDLHT’s capital structure was weaker as evidenced by lower proportion of hedged/fixed borrowings and higher cost of debt. “While inflationary cost pressures and higher energy prices could compromise profitability levels in the near to medium term, some of these costs can be passed on in the form of higher room rates especially in strong markets or in periods of high demand,” he explains.
As a result, the analyst says he sees “muted share price impact” due to no DPU disclosure and global macro-economic uncertainty. His target price of $1.15 is based on an average of DDM and revalued net asset value (RNAV) valuations.
In Koh’s DDM valuation, he has made the assumptions of a risk-free rate of 2.13%, overall COE of 9.4% and a terminal growth rate of 2.7%. “We do not factor in any potential earnings accretion or dilution from any unannounced acquisitions. For RNAV, we value its portfolio at a weighted average cap rate of 5.2%, with Singapore at 4.4%,” he adds.
Key upside risks to his investment thesis include a faster-than-expected lifting of border restrictions and resumption of leisure/corporate travel, as well as a lower-than-anticipated borrowing cost.
On the other hand, downside risks include a slowdown in arrivals growth due to weakness in regional economies, prolonged viral outbreaks that curb travel from key source markets and further deterioration in corporate demand, leading to intensified pressure on hotel room rates and other related spending.
Meanwhile, a strong Singdollar could also impede arrival growth from key regional countries such as Indonesia and Malaysia.
As at 1.52pm, units in CDLHT were trading flat at $1.26.
