DBS Group Research is maintaining its “buy” call on CDL Hospitality Trust (CDLHT) J85 with a reduced target price of $1.55 as valuations are rolled forward.
“CDLHT continues to be one of the top hospitality Singapore REITs (S-REITs) to benefit and ride on record-high revenues per available rooms (RevPARs) in Singapore since 1HFY2022, with hotels in prime locations and well positioned within both the leisure and corporate travel segments in Singapore. Its overseas hotels are seeing a robust rebound in RevPAR on the back of resumption of travel demand,” write analysts Geraldine Wong and Derek Tan in their July 31 report.
For the 1HFY2023 ended June 30, CDLHT reported a gross revenue of $119.2 million, up 20.9% y-o-y and NPI of $62.9 million, up 23% y-o-y.
The robust jump in net property income comes off the back of robust operational performance, led by improved performance from its hotels in Singapore, Japan, Australia, Europe and the UK coupled with a six month contribution from Hotel Brooklyn, which was acquired in February 2022.
This stronger performance helped offset the lower showings from its New Zealand and Maldives markets.
Wong and Tan also point out that performance would have been even stronger if not for the closure of around 34,000 room nights for selected hotels due to asset enhancement initiatives (AEI).
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The analysts say: “We note that distributable income increased by a similar 23.8% y-o-y to $31.2 million (y-o-y), translating to a DPU of 2.51 cents after 10% retention, which was higher by around 23% y-o-y. Net property income and distributions were down by 13% and 30% y-o-y, largely due to a seasonally stronger second half which historically contributes 55% to 60% of the full year performance.”
While the double-digit DPU growth was “encouraging”, CDLHT’s DPU for the six-month period still stood below Wong and Tan’s estimate.
Meanwhile, gearing levels remained stable at 37.9%, with a headroom of close to $715 million (to 50% gearing), with minimal expiries in FY2023, around 7.6% of overall debt.
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Interest costs have inched higher to around 4.1% ended June, 0.3 percentage points higher q-o-q.
The analysts also note that fixed rate debts had dipped to around 45%, which was done on purpose given the management’s view that hedging too high a level would be costly.
“Our expectations of strong ebitda growth in FY2023 to FY2024 should be able to compensate for the increase in interest rates, which should be nearing a near term peak,” say the analysts.
Wong and Tan like the stock and are generally constructive on CDLHT’s outlook for FY2023, citing the “accelerating momentum in most markets” as travel recovers due to corporate travel demand.
“We sense most optimism for its Singapore hotels which make up around 61% of net property income, on the back of a robust pipeline of events, concerts and the upcoming Formula One [race] at the end of September,” opine Wong and Tan.
The group’s overseas hotels in Europe, Japan and the UK are also seeing a pick-up in forward bookings momentum.
The way the analysts see it, as operational performance continues to shine, they project DPUs to continue growing at around 10% CAGR over FY2023 to FY2025, driving yields towards the 6% level.
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This comes about despite the impact of higher interest costs and operational costs as room rates outpace cost increases.
Wong and Tan continue: “Historically, we note a positive correlation between RevPAR growth, DPU growth and share price and believe that the strong operational performance will drive the share price higher. Our numbers are cut to assume more conservative growth assumptions for Chinese dependent markets and spot currency rates.”
The analysts also note that the group’s pivoting towards the built-to-rent (BTR) sector amongst other possible lodging asset classes highlights the management’s strategic intent to build resilience through diversity and earnings stability post-pandemic.
With varied demand drivers, compared to hospitality assets, the analysts believe the BTR investments will be “value accretive” and complements the company’s portfolio.
That said, whilst the medium-term outlook looks positive, the analysts have refreshed their estimates as they moderate RevPAR assumptions for Maldives, New Zealand and Singapore to assume a more conservative RevPAR growth rate of 15% against 20% y-o-y for 2023 given the slower than expected recovery of Chinese tourists.
They have also marked their currency assumptions to market.
Downside risks include recession, which could hurt demand for travel, whilst currency volatility and higher interest rates which would impact projections.
As at 3.25pm, units in CDLHT are trading one cent lower or 0.84% down at $1.18 on Aug 1.
