SINGAPORE (Aug 2): OCBC Investment Research is rating OUE Hospitality Trust (OUEHT) as its top pick among the hospitality REITs, after OUEHT on Tuesday posted a “blockbuster” 31.5% growth in distribution per unit (DPU).
OCBC is keeping its “buy” call on OUEHT with a higher fair value estimate of 82 cents, from 75 cents previously.
OUEHT saw distribution per stapled security (DPS) surge to 1.21 cent for the second quarter ended June, from 0.92 cents a year ago.
This came on the back of a 16% growth in gross revenue for 2Q to $31.2 million, on the back of improved performance at Mandarin Orchard Singapore (MOS), Crowne Plaza Changi Airport (CPCA), and Mandarin Gallery shopping mall.
See: OUE Hospitality Trust sees 2Q DPS rise 32% to 1.21 cents on higher revenue
“OUEHT’s spectacular year-on-year DPU growth is the highest posted by S-REITs under our coverage thus far,” says OCBC lead analyst Deborah Ong in a Wednesday report.
In particular, Ong notes that the positive results at MOS was surprising, with revenue per available room (RevPAR) in 2Q increasing 5% y-o-y to $210.
“OUEHT's strategy of maintaining rates has paid off, with MOS’ average daily rate (ADR) growing by an estimated 1-2% and occupancy growing around 3-4 percentage points y-o-y to a mid-80% range,” Ong says.
In addition, Ong points out that the ramp-up at CPCA continues to progress smoothly post the opening of its new extension. Mandarin Gallery also turned in a strong performance, with average occupancy rate pushed up to 93.9% with the help of Victoria’s Secret.
“Given brighter operational prospects in the near-term with a sunnier outlook for MOS and the healthy contributions expected from Mandarin Gallery, we lower our cost of equity from 7.9% to 7.6%,” Ong says. “Given the positive operational outlook as well as currently undemanding unit prices, we re-iterate ‘buy’ on OUEHT as our top pick within the hospitality REIT sub-sector.”
Meanwhile, DBS Group Research notes that OUEHT’s share price has rallied by over 10% year-to-date.
But DBS lead analyst Mervin Song believes there is still room for growth.
“The rally is not over,” Song says in a report on Wednesday.
“Investor interest in OUEHT is still in the early stages,” Song opines. “And as we approach 2018, a recovery in the Singapore hospitality market should drive OUEHT’s share price higher.”
DBS is keeping its “buy” call on OUEHT with a higher target price of 80 cents, from 76 cents previously.
Song says OUEHT appears to be fairly valued on a headline basis, with its current share price trading close to the consensus target, implying a price-to-book ratio of 1x.
However, the analyst says OUEHT remains attractive even at 1x P/B. “We look back to the 2010-2011 period where its comparable CDL Hospitality Trust traded up to 1.5x P/B during an upswing in the Singapore hospitality market,” Song says.
In addition, he points out that while OUEHT is an “attractive value stock,” it is still currently under the radar.
“The stock offers a relatively high yield of 6.4%, which compares favourably to some REITS whose yields have compressed to the mid-to-low 5%,” Song adds.
As at 1.17pm, units of OUE Hospitality Trust are trading half a cent higher at 76.5 cents.
