Even with the acquisition of Crowne Plaza Changi Airport (CPCA), distribution income for 2Q15 slid 6.6% YoY to S$20.2m, with DPS declining 7.3% to 1.52c. The topline was lower than expected, mainly due to weaker contribution from Mandarin Orchard Singapore (MOS). Mandarin Gallery also demonstrated weaker performance with NPI decreasing 5.4% YoY to S$6.7m, though this may be temporary due to lower occupancy rate and fit-out periods as part of lease renewal.
No respite from the strong industry headwinds
According to the Singapore Tourism Board, international visitor arrivals fell 4.1% in 5M15, with the upscale hotel segment RevPAR declining 4.5% YoY over April-May 2015. MOS appeared to have fared worse, with RevPAR declining from $242 in 2Q14 to $218 in 2Q15 (1Q15: $223). Even with a visible pipeline of events and attractions (e.g. STB Golden Jubilee, National Gallery, KidZania, declaration of Singapore Botanic Gardens as a UNESCO Site), tourism arrivals may continue to face pressure amidst a strong Singapore dollar and the looming hotel supply. We now expect FY15 revenues from MOS to decrease 10% YoY (previous: -3%).
A limit to further leverage
With MAS introducing a 45% limit on gearing, OUEHT’s 42.1% gearing ratio implies a very low little debt headroom. If OUEHT acquires CPCA’s extension with a larger portion of equity, this may be DPU dilutive.
Expiry of interest rate swaps
OUEHT has S$300m of floating rate debt after the expiry of interest rate swaps (IRS) in July 2015, and there will be another S$140m of IRS expiring in July 2016. If OUEHT were to fix its debt and extending the IRS maturity, OUEHT’s cost of debt may likely increase from its current 2.5%.
Cutting our target price
We reduce our TP from S$0.93 to S$0.795, as we cut our estimates, increase the cost of equity by 50bp to 8.33% while we rollover our model to 2016. We think that the higher cost of equity is required with greater industry uncertainty and a reduced headroom for further acquisitions. However, we will be maintaining our HOLD call, as we are expecting total returns of -3.1%, supported by ~7% dividend yield. (Read Report)
Source : KGI Fraser Research