RHB keeps CDL Hospitality Trusts 'neutral' amidst a slow recovery

RHB may be upbeat on CDLHT's recovery but spots some bumps up ahead.

RHB Group Research is maintaining its “neutral” call on CDL Hospitality Trust (CDLHT) J85 with an unchanged target price of $1.25, as data has shown a steady growth in Singapore visitor arrivals and a promising 2024 with major concerts and air shows coming up.

“However, we expect the return of high-spending Chinese tourists to remain weak, and see a slow recovery in corporate travel. CDLHT also faces challenges from rising interest costs and foreign exchange (FX) impact,” says analyst Vijay Natarajan.

In his July 12 report, the analyst notes that the 6.3 million visitors of 1H2023 was equivalent to 2022’s numbers, or 67% of pre-pandemic levels. Most visitor arrivals were fuelled by the key markets of Indonesia, India and Malaysia.

Thanks to the higher visitor arrivals, hotel revenue per available room (RevPAR) for 5M2023 surged 21% from pre-Covid levels (5M2019). This was a result of a strong 32% increase in room rates from pent-up demand from the tourism space, with the high-end segment seeing a heightened demand.

“Overall, we expect full-year Singapore RevPAR to come in 15-20% above pre-pandemic levels and flatten out next year. This will remain the key driver of CDLHT’s net profit income (NPI), with two-thirds of its portfolio positioned on the mid-tier to upscale segment of the Singapore market,” writes Natarajan.

Meanwhile, the analyst still sees room for upside in CDLHT’s Singapore hotel valuations.

The recent sale of Park Royal Kitchener Hotel at a 24% premium is a strong indication of  continued investor interest in the Singapore hospitality market, which will likely have a reverberating effect for upscale hotels.

“The sale, in our view, will likely result in positive valuation rerating for upscale hotels, benefitting the REIT’s Singapore assets,” says Natarajan.

CDLHT’s gearing at 37.5% as at 1Q2023 is modest according to the analyst, but will be expected to rise by 1-2 percentage points (ppts) with the ongoing progressive payments for UK build-to-rent developments and asset enhancements in Singapore.

The trust’s management has said that it is on the lookout for acquisition opportunities, with a focus on overseas markets such as UK and Japan. It also sees opportunities from over-leveraged buyers.

Overall, Natarajan remains cautious of CDLHT and has three reasons to support his stance: slow recovery of China visitors coming back to Singapore; CDLHT’s earnings are weighed down by rising interest costs, as it has among the lowest debt hedges among SREIT’s at about 56% and has nearly half of its debt maturing in 2023-2024; as well as performance at its overseas markets has been mixed and the analyst expects the rising SGD to weigh on overseas earnings.

“We expect Chinese visitor recovery to remain patchy and see a return to pre-pandemic levels only by 2025, in addition to rising inflationary pressures and dissipation of pent-up demand posing challenges for visitor arrivals,” adds the analyst.

As at 4.00pm, units in CDLHT are trading at $1.20.

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