CFA Society Singapore
SINGAPORE (Jan 31): OUE Hospitality Trust (OUEHT), trading at 10% discount to book, should re-rate from its current levels after the 2H18 correction as the hospitality industry is in the midst of a multi-year recovery, says DBS Group Research.
FY18-FY19 are transition years with flattish DPU given the loss of income support, impact from higher borrowing costs, and Crown Plaza Changi Airport still taking time to ramp up. This combined with fears over a rights issue similar to that done by its sister REIT, OUE Commercial REIT, caused OUEHT’s share price to correct over the last 6-9 months, says DBS.
In a Wednesday report, DBS lead analyst Mervin Song believes these issues are largely priced in as OUEHT currently trades at 0.9 times book value which is in line with -1SD of its mean P/B, and its forward yield of 7.2% is also close to +0.5SD of its mean yield of 7.4%.
“We maintain our DCF-based target price of $0.85. With 22% capital upside we reiterate our ‘buy’ call,” says Song.
DBS says OUEHT should trade at a premium to book, given its leverage to a multi-year recovery in the Singapore hospitality market given limited new supply and premium prices paid for hotels.
“We look back to the 2010-2011 period where comparable peer CDL Hospitality Trust traded up to 1.5x P/B during an upswing and see the potential for OUEHT to trade up to 1.1x P/B as implied by our target price,” says Song.
While OUEHT’s high yield makes it difficult to find accretive deals, Song believes an inorganic strategy remains a key share price driver. Beyond its sponsor’s assets, OUEHT is seeking opportunities in Europe, US and Japan.
As at 11.07am, units in OUEHT are up 0.5 cent at 73 cents giving it a FY20F dividend yield of 7%.