Wednesday, January 07, 2015

OUE Hospitality Trust - Looking past near-term volatility

What Happened 
Recent hotel statistics released by Singapore Tourism Board (STB) point to continued weakness in the hotel segment in Singapore for 11M14, with RevPAR dipping by 1% yoy and occupancy easing by 0.8%. RevPAR in Oct 14 and Nov 14 remained weak with the luxury segment reporting -1.8% and -2.9% yoy respectively while upscale hotel segment for the same period reported -3.2% and +0.6% yoy respectively. 

What We Think
Together with the continued volatility in the Indonesian rupiah in Dec 14, the data suggest slightly weaker 4Q14 results for OUE-HT which historically derives c.30% of its business from Indonesian customers. That said, we believe that OUE-HT is well-positioned to benefit from the stronger hospitality outlook for 2015 as 1) visitor arrivals are expected to increase by 2-4% in 2015, 2) Singapore is scheduled to host more major international sporting events including the Southeast Asian (SEA) Games and 3) the government is intensifying efforts to revitalise Orchard Road and turn it into a vibrant lifestyle destination. Given these efforts and additional income from the recently proposed acquisition of the c.S$495m Crowne Plaza Hotel at Changi Airport (CPCA), we believe that OUE-HT’s 2015 outlook is more sanguine than the year before. Assuming that the acquisition is completed with the issuance of S$115m worth of new units in FY15, the leverage ratio is expected to rise to 35.7% in FY15 and 41.4% in FY16 as the two phases of Crowne Plaza are acquired. This in turn is expected to boost DPU marginally by 0.1% in FY15 and 2.5% in FY16. 

What You Should Do
Despite potential near-term earnings volatility, we remain bullish on OUE-HT given the stronger outlook, coupled with additional income from the acquisition. We maintain our Add rating as we continue to see value in this REIT, which currently offers 7.8% dividend yield vs. its peers’ 7.3% and trades at 1.0x P/BV.

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