SINGAPORE (Jan 29): DBS and CIMB are maintaining their "buy" calls on CDL Hospitality Trusts (CDREIT) with target prices of $2.00 and $1.92 respectively.
With supply set to ease over the next three years, DBS expects a recovery in the Singapore hospitality market with revenue per available room (RevPAR) potentially growing by 3-5% p.a.
"This, combined with CDREIT’s recent acquisitions, should result in DPU CAGR of 6% between 2017-2020 which compares favourably against the modest 1-3% growth for many other REITs," says DBS lead analyst Mervin Song in a Monday report.
DBS says the "hold" recommendation of consensus with a target price at $1.68 implies CDREIT’s Singapore portfolio is valued at $600,000 per key.
But with a potential upturn in the Singapore market over the next three years, this figure is too conservative, says Song.
"We believe given the quality of its properties, CDREIT will re-rate closer to our target price which implies price per key of $850,000 for its Singapore portfolio," says the analyst.
Meanwhile, CIMB expects CDREIT’s Singapore hotels to achieve a 5% y-o-y improvement in RevPAR in FY18, supported by only a 1.2% new supply in 2018, the return of large biennial events, Singapore's chairing of the 32nd Asean summit and ramp-up of Changi Terminal 4.
"We note that this is the upper-end of management’s guidance. While its Singapore hotels recorded a 5.5% RevPAR decline in the first 24 days of Jan, we expect this to be neutralised by month-end," says CIMB lead analyst Yeo Zhi Bin in a Friday report.
CDREIT recently completed the divestment of Mercure Brisbane and Ibis Brisbane for A$77 million ($81.5 million).
Proceeds would be used to pare down borrowings while part of it could also be used to top up distributions to mitigate the effects of the divestment.
As at end 4Q17, gearing improved to 32.6% from 33.3% at 3Q17.
Yeo says CDREIT has ample debt headroom to fund acquisitions and target markets could include Europe, Japan and Australia.
"With minimal supply further out, we believe that the cyclical recovery in hotels could potentially lead to a multi-year upswing," says Yeo, "Hence, we advise investors to remain invested in CDREIT, the bellwether of the Singapore hospitality sector."
On the contrary, OCBC is downgrading CDLHT to "sell" from "hold" as it believes risk-reward for the REIT is skewed to the downside against the closing price on Friday after a spectacular 33% rally in the last 12 months.
Given the RevPAR increase, we are more positive on the strength of the rebound in the local hospitality market this year, says lead analyst Deborah Ong.
"After adjusting our forecasts and increasing our nominal growth rate of dividends in the mature state from 1.5% to 2.0%, our fair value increases from $1.555 to $1.60," adds Ong.
As at 11.17am, units in CDREIT are trading 1 cent higher at $1.83 or 5.8% FY19 distribution yield.
