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OUE Hospitality Trust's early refinancing to result in higher DPU, says RHB

Michelle Zhu
Michelle Zhu • 3 min read
OUE Hospitality Trust's early refinancing to result in higher DPU, says RHB
SINGAPORE (Jan 3): RHB is maintaining its “buy” call on OUE Hospitality Trust (OUE HT), while raising its target price on the REIT to 91 cents from 88 cents previously to factor in a cost of equity (COE) of -7.2% and 2% terminal growth for FY18F and F
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SINGAPORE (Jan 3): RHB is maintaining its “buy” call on OUE Hospitality Trust (OUE HT), while raising its target price on the REIT to 91 cents from 88 cents previously to factor in a cost of equity (COE) of -7.2% and 2% terminal growth for FY18F and FY19F, respectively.

This implies that the stock offers a respective FY18F-19F yield of 6.2% and 6.6% as distribution per unit (DPU) projections are adjusted higher by 2-3%, after taking into consideration interest cost savings from the early refinancing of the trust’s debts as its manager announced on 19 Dec.

In a Wednesday report, analyst Vijay Natarajan says the move places OUE HT in good shape ahead of the expected interest rate hikes in the near-term, as the average cost of debt post-refinancing would be 2.4%, or 40bps lower than the current interest cost of 2.8%. This should result in finance cost savings of $2-4 million per annum.

He further adds that the trust is well-positioned to benefit from Changi Airport’s growth, particularly in the case of its Crowne Plaza Changi Airport Hotel (CPCA) property given its position as the only hotel located within the airport’s premises.

“The opening of Terminal 4 (T4) on 31 Oct increased passenger handling capacity by ~25%. With a higher capacity, we expect airlines to add new destinations and increase flight frequencies, which in turn should drive passenger growth and visitor arrivals… While rental support expiry would have a slight negative impact, we expect this to be offset by organic revenue per available room (RevPAR) growth,” says Natarajan.

Going forward, the analyst expects continued demand growth along with lower hotel room supply to result in a RevPAR growth of 3-8% for Mandarin Orchard Singapore (MOS) in 2018, with higher room demand to boost revenue growth from the trust’s food and beverage (F&B) segment by 5-10%.

Meanwhile, Natarajan notes how Mandarin Gallery’s committed occupancy remains healthy at 94.7% despite a challenging retail climate, with the trust moving towards a higher variable rent structure for its new leases to negate the impacts of effective negative rent reversions.

“Looking ahead, there is minimal retail supply pipeline in the Orchard area. The lower supply, combined with government initiatives to spruce up the retail scene, should limit downside risks,” he adds. “Potential upside could arise from stronger-than-expected growth in visitor arrivals and better corporate segment demand.”

As at 10:44am, units in OUE HT are trading flat at 86 cents, or FY18F dividend yield of 6.27%.

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