SINGAPORE (Apr 10): CIMB is maintaining its "overweight" on the hospitality sub-sector given expectations of an earlier and stronger than expected recovery in industry RevPAR.

Unlike the residential and office sub-segments such which could face higher supply come 2021, CIMB says hotels have minimal new supply.

"Hence, the cyclical recovery could potentially lead to a multi-year upswing," says analyst Yeo Zhi Bin in a Monday report.

To recap, 2017 was a bumper year for Singapore tourism. Visitor arrivals/visitor days grew 6.2% y-o-y to 17.4 million; visitor days grew 4.6% y-o-y to 58.8 million days; tourism receipts rose 3.9% y-o-y to $26.8 billion.

However, industry RevPAR inched down 1.6% y-o-y in 2017 due to higher supply. Luxury hotels booked 3.2% y-o-y decrease; economy booked 8.6% gain.

In Jan, Singapore Tourism Board (STB) reported 5.4% y-o-y growth in visitor arrivals. While China registered an 8% y-o-y drop in arrivals, this was more than offset by a 3.4% growth in Indonesian and 35% growth in Indian arrivals.

Visitor days increased by 1.2% in Jan. Average length of stay remained stable at 3.4 days.

For 2018, STB expects growth in both visitor arrivals and tourism receipts. Changi passenger movements recorded 3.1% y-o-y increase in movements for 2M18. Meanwhile, CIMB's channel checks revealed that the demand for hotels in 1Q18 was healthy.

With supply tapering off and demand dialling up, CIMB is projecting 7% y-o-y growth in RevPAR for 2018.

For hospitality S-REITs, CIMB continues to expect 5% y-o-y recovery in RevPAR. This is at the top end of the respective managers’ guidance of 2-5% improvement.

Together with inorganic acquisitions, CIMB expects CDREIT to deliver 6.2% y-o-y growth for FY18 DPU; Far East Hospitality Trust to deliver 8.9% and OUE Hospitality Trust, 0.6%.

See: Can Singapore's hotels depend on automation to ease its manpower woes?

CIMB's preferred pick in the sub-sector is CDREIT. Yeo notes that despite the state of emergency in Maldives, visitor arrival growth was healthy at 16% y-o-y in 2M18. CIMB has a target price of $1.92.

FEHT also gets an "add" with a 79 cents target price, driven by the local recovery and inorganic contribution from Oasia Hotel Downtown.

OUE HT has a 92 cents target on higher hospitality contributions, a relatively more stable Mandarin Gallery and lower finance expenses which would offset the absence of income support in FY18.

Sector downside risks include higher increase in interest rates and slower-than-expected recovery for Singapore hotels.

As at 11.55am, units in CDREIT, FEHT and OUEHT are trading at $1.73, 68 cents and 82 cents respectively.