CFA Society Singapore
SINGAPORE (Feb 7): OCBC Investment Research is maintaining “overweight” on Singapore’s hospitality space as the sector’s REITs – namely CDL Hospitality Trusts (CDL HT), Ascott Residence Trust (ART) and Far East Hospitality Trust (FEHT) – rally into the new year with total returns of +5.7%, +2.5% and +6.5%, respectively.
In a Thursday report, analyst Deborah Ong attributes the recent rally to three catalysts, namely: favourable operational outlooks by the three REITs on RevPAR growth; expectations of a pause in the Fed rate hike; and recent hospitality transactions conducted at rich valuations versus valuations of comparable assets on balance sheets.
In particular, Ong has highlighted OUE Hospitality Trust as OCBC’s top “buy” pick with a fair value estimate of 82 cents. At the unit price of 69 cents, its FY19F dividend yield of 7.1% is 70 bps and 150 bps over that of FEHT’s and CDL HT’s, respectively.
“OUE HT is one of only two SG-only hospitality REITs, and we expect the REIT’s assets to benefit from the benign hotel room supply situation locally. In addition, we expect RevPARs at Crowne Plaza Changi Airport to be boosted when Jewel Changi Airport opens in 1H19, while OUE HT’s key asset Mandarin Orchard Singapore looks to benefit from the proposed plans to rejuvenate Orchard Road, which were announced recently,” explains Ong.
FEHT and ART have also been rated “buy” with fair value estimates of 67.5 cents and $1.25, respectively. OCBC likes the former for its SG-hospitality focus and undemanding valuations, as well as the latter for its successful capital recycling and a defensive portfolio of high-quality assets.
Meanwhile, the research house remains cautious on the outlook of CDL HT on the belief that its 1Q19 earnings may be dragged down by the closure of its Maldives resort, Dhevanafushi Maldives Luxury Resort (DMLR).
The trust is rated “hold” and has a fair value estimate of $1.56.
“We believe it is possible that the Maldives resort may continue to be a drag even after its opening in early 2Q19, given that the asset will need time to ramp up occupancy. That said, we do recognize CDL HT as another beneficiary of the SG hospitality upturn and continue to monitor the stock for a more compelling entry,” says Ong.
Units in CDL HT, ART, FEHT and OUE HT last traded at $1.67, $1.17, 66 cents and 71 cents before the midday trading break.