SINGAPORE (April 27): RHB is upgrading its call on CDL Hospitality Trusts (CDL HT) from “hold” to “buy”, raising its price target to $1.62 from $1.47 previously on the belief that the hospitality REIT is nearing inflection point.

To recap, the managers of CDL HT yesterday posted a 9% increase in 1Q17 distribution per stapled security (DPS) of 2.42 cents, supported by strong net property income (NPI) growth from Grand Millennium Auckland as a result of higher variable rental income.

(See also: CDL Hospitality Trusts reports 9% rise in 1Q17 DPS of 2.42 cents)

“We expect a turnaround in Singapore hotel RevPAR in 2018 with supply headwinds fading away. Demand is expected to stay resilient with the opening of the new Changi Airport terminal in 2H17 combined with Singapore Tourism Board’s (STB’s) marketing efforts,” says analyst Vijay Natarajan in a report on Thursday.

CDL HT offers FY17F and FY18F yields of 6.9% and 7.3% respectively, he adds, which the research house deems attractive.

Noting hotel supply that is in the midst of tapering off, which is hence likely to cause a rebound in RevPAR, as well as improved occupancy and declining room rates over 1Q17, Natarajan believes room rates will stabilise and pick up later this year as the competitive pressure eases.

He also remains positive on STB’s recent efforts to promote Singapore as a tourist destination, given its tie-up with JTB Corp and The Walt Disney Company (South East Asia) in addition to the joint partnership between STB, Changi Airport Group and Singapore Airlines (SIA) to invest a total of $34 million to promote Singapore as a stopover or twinning destination.

In other markets, Natarajan thinks hotel performance in the Maldives and Australia are likely to be subdued, with the former being impacted by a slowdown in Chinese visitors and a stronger USD, while the latter facing risks from new supply and weak demand.

Although its Japan hotels saw an overall RevPAR decline due to price sensitive travellers reacting to a stronger yen, he expects UK hotel performance to remain strong with the weaker GBP propelling strong inbound travel.

“In the near-term, New Zealand remains the key growth driver aided by strong market fundamentals and favourable lease structures. With the worst likely behind it and a turnaround in sight, we expect a potential re-rating of the hospitality sector,” concludes the analyst.

As at 11:16am, units of CDL HT are trading 1 cent higher at $1.52.