■ Results impacted by the absence of income support but RevPAR for Mandarin Orchard up 2% y-o-y
■ Management focused on driving room rates in 2018 with early success in January 2018
Rally not over. We reiterate our BUY call with a revised TP of S$0.93. OUE Hospitality Trust’s (OUEHT) share price has rallied by over 30% since early 2017 on the back of a recovery in DPU as we had expected but we believe the rally is not over. Investor interest in OUEHT should continue to increase as the recovery in the Singapore hospitality market in 2018 gains momentum and revenue per available room (RevPAR) at its key asset Mandarin Orchard Singapore is still depressed at S$225 versus during peak period at over S$250. This should drive OUEHT’s share price higher. OUEHT is attractively valued, trading at a relatively high forward yield of 5.8%, and compares favourably to some REITS whose yields have compressed to the mid-to-low 5%.
Where we differ – P/B can expand further. While consensus has caught up to our view that OUEHT should trade at a premium to book with consensus’ TP implying a P/B of 1.1x, we believe with a multi-year recovery in the Singapore hospitality market, OUEHT should trade at a higher premium to book. 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. Thus, OUEHT remains attractive at c.1.16x P/B and can trade up to1.25x P/B implied by our TP.
Upside from acquisitions. With OUEHT’s distribution yield compressing over the past year from levels which we believe were unjustifiably too high in the first place, OUEHT is now in a strong position to pursue DPU accretive acquisitions. Beyond its Sponsor’s OUE Downtown serviced apartments, we understand OUEHT is also seeking opportunities in Europe and Japan. We have not incorporated any acquisitions in our DPU estimates.
On the back of higher earnings estimates, we raised our DCF-based TP to S$0.93 from S$0.90.
Key Risks to Our View:
The key risk to our view is a weaker-than-expected outlook for the Singapore hospitality and retail market. (Read Report)
Source : DBS Group Research