RHB upgrades CDLHT to ‘buy’ after recent selloff

“We believe the weakness presents a buying opportunity for investors looking to re-enter the Singapore hospitality sector": RHB.

RHB Bank Singapore analyst Vijay Natarajan has upgraded CDL Hospitality Trusts (CDLHT) J85 to “buy” from “neutral” as he sees a “buying opportunity” into the REIT amid the recent selloff.

“CDLHT’s share price fell [around] 12% over the last month amid a broader sector selldown on higher interest rate concerns,” says the analyst, who kept his target price unchanged at $1.25.

“We believe the weakness presents a buying opportunity for investors looking to re-enter the Singapore hospitality sector, with Chinese visitor arrivals showing signs of a rebound,” he adds.

“While CDLHT’s low fixed-debt position (48%) makes it susceptible to high interest rates, we believe this is priced in at current share price levels of [around] 30% discount to book value,” he continues.

In his report dated Sept 5, the analyst notes that the REIT is poised to ride on the recovery of the Singapore hospitality sector with the return of Chinese visitors.

The number of visitor arrivals in Singapore surged by 26% on a m-o-m basis to 1.4 million in July, coming in around 79% of pre-pandemic levels (July 2019).

The growth was driven by the more than doubling of Chinese visitors on a m-o-m basis to 231,326, who “reclaimed their position as the largest overseas visitor market, overtaking Indonesia”, Natarajan notes.

“While the strong surge in Chinese visitors comes as a slight surprise amid China’s weakening economic outlook, it augurs well for Singapore’s tourism outlook,” he says, adding that Chinese visitors accounted for around 20% of the total visitor count to Singapore before Covid-19.

In July, hotel revenue per available room (RevPAR) hit a new high of $261, which was up by 20% on a m-o-m basis with a surge in island-wide hotel occupancy levels at 90% and “persistently high room rates”.

In addition, the outlook for Singapore’s hospitality industry looks “promising” for the rest of 2023 and the first half of 2024 due to the full resumption of direct flights from China as well as a strong pipeline of events including the upcoming Formula One (F1) event in September as well as the Singapore Air Show in February 2024. Concerts by Coldplay and Taylor Swift, who will be in Singapore in January and March 2024 respectively will also provide a boost to the industry, notes the analyst.

To this end, he sees CDLHT as poised to ride on the recovery thanks to its “high-quality portfolio of upscale hotels across the island [which comprises around 62% of the REIT’s total net property income or NPI]”.

Overseas, CDLHT’s European portfolio is looking bright with the outlook for its UK, Germany and Italian hotels remaining positive due to the recovery of travel as well as a “robust event and exhibition pipeline”.

However, CDLHT’s properties in the Maldives and New Zealand are expected to continue to see weak performances on the back of increased supply and cost pressures.

As at June 30, CDLHT’s gearing stood at a “comfortable” 37.9% in which Natarajan does not see an “imminent need for equity fund raising.”

“Overall, we expect a slight increase in its Singapore hotel portfolio value upon the year-end revaluation offsetting the foreign exchange (forex) impact,” he says.

CDLHT’s commitment to a forward purchase of the upcoming Moxy hotel in Singapore for the lower of $475 million or 110% of the hotel development costs will also be a “good addition” amid scarce market opportunities to acquire local properties, notes the analyst. The Moxy hotel, which is a redevelopment of the former Novotel Singapore Clarke Quay, is expected to be completed by 2025.

Natarajan has revised his distribution per unit (DPU) estimates for the FY2023 to FY2025 by -4% to 0% after “fine-tuning” his RevPAR and interest cost estimates.

He has raised his environmental, social and governance (ESG) score to 3.2, above the country median of 3.0%, thereby imputing a 4% premium to CDLHT’s intrinsic value.

As at 12.27pm, units in CDLHT are trading 3 cents higher or 2.91% up at $1.06.

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