CDL Hospitality Trusts

Kim Eng on 18 June 2012

Growth to moderate. The prospect of a slowing economy in China and India, the unfolding of the Eurozone crisis and the US economy’s snail’s-pace recovery will no doubt impact tourism in Singapore. After a record 2011, the Singapore Tourism Board expects 2012 to see a moderation in growth with around SGD23-24b in tourism receipts and 13.5-14.5m in visitor arrivals.

Supply glut looms. We expect 14.2m tourist arrivals in 2012, up 8% from 13.2m in 2011. From 2011 to 2015, we estimate that hotel room supply (measured in terms of available room nights) will grow at 6.3% CAGR, outstripping demand growth of 5.9%. In all, 11,441 new rooms (23.5% of existing stock) from known projects will be added to the market between 2Q12 and 2015. This will push the number of gazetted hotel rooms past the 50,000 mark by 2015. However, so long as occupancy levels exceed 80%, we expect the average room rate (ARR) to hold above SGD245.

ARR to slow to 3.2% pa over 2011-2015. Singapore hotels have, and will continue to benefit from the growth in tourist arrivals, which we project at 5.2% CAGR over 2011-2015F. But the additional supply of hotel rooms will put a damper on occupancy rates, which we estimate will peak at 90% in 2012F before easing to 84% in 2014F. This means that revenue per available room (RevPAR) could hit a new high of SGD233 in 2012F but fall to SGD227-229 in 2013F-2014F and peak again at SGD237 in 2015F.

Maintain HOLD. In our view, the main share price trigger for CDL Hospitality Trusts (CDREIT) is overall ARR growth for the Singapore hotel segment (76% correlation). The group derived more than 80% of revenue from Singapore hotels in FY11, with the region accounting for over 80% of its asset value. We expect Singapore hotels to register 3.2% ARR CAGR over FY11-15F, which should put a cap on CDREIT’s share price. Reiterate HOLD with a DDM-derived target price of SGD1.94. With volatility in the stock markets and more hotel rooms coming on-stream, we would advise investors to stay cautious. At FY12F DPU yield of 6.4%, they would be better off with the more defensive industrial and retail REITs such as Ascendas REIT (~7% yield) and Frasers Centrepoint Trust (~6% yield).