SINGAPORE (Jan 4): CIMB is "overweight" on the hospitality REIT sub-sector given RevPAR for Singapore hotels is expected to recover stronger at 7% y-o-y in 2018 versus 3% previously.
With supply tapering off and demand continuing to dial up, CIMB expects RevPAR climbing another 5% to $224 in 2019, potentially reaching the previous peak recorded in 2012.
"In addition, our bottom-up RevPAR analyser suggests that hospitality REITs, especially CDL Hospitality Trusts and OUE Hospitality Trust, are already at an inflection point," says analyst Yeo Zhi Bin in a sector report on Tuesday.
Hospitality consultant Horwath HTL estimates that new room supply in Singapore is expected to post a CAGR of 2.1% during 2016-2020 versus CAGR of 5.1% in 2010-16.
Together with the lack of new land for hotels, CIMB believes the limited supply going forward will underpin a recovery in RevPAR.
In addition, after visiting some of the newest hotels in the city, Yeo says his worries of fierce competition have been allayed.
"We found the new hotels to be holding up rates. Reflecting healthy demand, occupancy at the new hotels is strong," says the analyst.
CIMB is projecting 4% y-o-y growth in visitor arrivals for 2017, 6% for 2018 and 3% for 2019. Visitor CAGR is also projected to grow 4.3% over 2016-2019 vs. 3.1% CAGR in the downcycle period of 2013-16. Incremental demand will also outstrip additional supply.
"We believe that growth in 2018F will be underpinned by the return of large biennial events, the ramp-up of Changi Airport Terminal 4 as well as topdown efforts to boost tourism," says Yeo.
Against the backdrop of a sharper recovery, CIMB is assuming higher organic growth for the hospitality REITs.
"We upgrade FEHT and CDLHT from 'hold' to 'add' and retain 'add' on OUEHT," says Yeo.
Far East Hospitality Trust is CIMB's preferred pick in the hotel sub-sector with 84 cents target price. Yeo now projects 10% y-o-y growth in FY18 DPU, boosted by potential acquisition of sponsor’s Oasia Hotel Downtown.
Given that CDLHT is the bellwether hospitality stock, Yeo believes it would continue to outperform during the cyclical upturn. He has a $1.77 target price.
As for OUEHT, Yeo believes upgrades to Mandarin Orchard Singapore and lower interest costs could offset the absence of income support for Crowne Plaza Changi Airport and sluggish retail. Maintain "add" with a higher target price of 89 cents.
As at 11.05am, units of FEHT, CDLHT and OUEHT are trading at 72 cents, $1.70 and 88 cents or FY18 dividend yields of 6.25%, 5.9% or 5.8% respectively.
