With travel plans back on the cards in 2021, the hospitality industry here is “waiting for lift-off”, owing to strong pent-up demand, says DBS Group Research analysts Derek Tan and Geraldine Wong.
“The hospitality sector has borne the brunt of the Covid-19 pandemic but there is now light at the end of the tunnel,” say the analysts in a Dec 1 note. “With vaccine candidates clearing final trials and entering production, mass travel (especially for leisure) is likely to resume in 2021.”
The analysts prefer Ascott Residence Trust and CDL Hospitality Trust for their attractive valuations, maintaining “buy” on both trusts with target prices of $1.20 and $1.40 respectively. Far East Hospitality Trust is the analysts’ next pick, with a “buy” call and target price of 70 cents.
“While some portion of future business trips may be permanently disrupted with the adoption of more virtual meetings, we expect that a majority of business meetings (including MICE) requiring travel will restart. Together with the strong pent-up demand for leisure travel, we see a “V-shaped” recovery taking shape as early as 2H21, assuming the mass distribution of Covid-19 vaccines is possible in the first half of 202,” they add.
See: Analysts mixed on Ascott Residence Trust on q-o-q RevPAU recovery in 3Q
The analysts believe it would take hospitality S-REITs to achieve pre-Covid DPUs only in 2-3 years’ time. Based on a 4-year normalisation trend, Tan and Wong project hospitality S-REITs to post 4-year distribution per unit (DPU) compound annual growth rate (CAGR) of 17% to 30%.
“Prior to the lifting of border restrictions globally, demand for travel in the near term will likely come from domestic travel, especially in countries like China, Australia, the USA and Europe, where internal flights have already started. As such, with their global portfolios, ART, CDLHT and FHT have the potential to post a faster recovery,” say Tan and Wong.
At home, the Singapore market, which contributes approximately 40% of hospitality S-REITs overall exposure, will likely see weaker metrics in 4QFY2020-1QFY2021 before posting a recovery, due to the tapering off in Government’s quarantine business, partially offset by limited foreign travel and local staycations, note DBS.
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“The sector is still at an early cyclical upturn stage and coupled with good value at price to net asset value ratio (P/NAV) of 0.77x, close to -1.5 standard deviation (SD) of its historical range. With a close historical correlation between revenue per available room (RevPAR) changes and P/NAV multiples, the sector will continue to re-rate,” say Tan and Wong.
As at 9.24am, units in Ascott Residence Trust are trading flat at $1.03, while units in CDL Hospitality Trust are trading 1 cent lower, or 0.78% down, at $1.27. Meanwhile, units in Far East Hospitality Trust are trading flat at 64.5 cents.
