CDL Hospitality Trusts: 2H11 to benefit from completed AEI (DMG)

(BUY, S$2.10, TP S$2.41)

2Q11 DPU rose 15% YoY, in-line with expectation. CDL Hospitality Trusts (CDLHT) reported DPU of 2.96S¢ (+15.2% YoY; +24.4% QoQ), representing 24% of our FY11 DPU estimate. Net property income rose 24% YoY to S$29.1m in 2Q11 (+18.1% QoQ) mainly due to 1) maiden contribution from Studio M Hotel which was acquired in 3 May 2011, and 2) higher RevPAR for Singapore Hotels at S$205 (+4.8% YoY; +5.1% QoQ), marginally offset by 3) drop in Orchard Hotel capacity due to refurbishment works. Given that the hotel business in Singapore is usually stronger in second half of the year, we expect CDLHT to post higher DPU in subsequent quarters. On the back of 1) lower FY11 distributable income payout assumption of 90% (prev 95%), and 2) higher FY11-FY12 average occupancy rate (AOR) at 88.6-89% (prev FY11-12 AOR: 88-87.5%), we adjusted our FY11-12 DPU by -4.8 - +2.2% respectively. Maintain BUY with lower TP of S$2.41, based on DDM (COE: 8.9%; TGR: 3.0%).

Income retention at 10% for 1H11 led to lowering of our assumption. In order to finance the hotel refurbishment works, the management has decided to retain 10% of distributable income vs historical retention rate of 5% in FY08-09. Hence, we reduced our distributable income payout assumption for FY11 to 90%. Meanwhile, Orchard Hotel and Novotel Clarke Quay underwent asset enhancement (AEI) works during 2Q11 which resulted in loss of 5,550 room nights (est ~2-3% of total Singapore hotel room nights). Following a greater level of AEI completion, we expect CDLHT’s performance to be boosted by the new capacities, and higher average room rates (ARR) as a result of AEI.

Strong tourist arrival growth. During Jan-May 2011, tourist arrivals rose 15% YoY to 5.3m, on track to meet Singapore Tourism Board’s (STB) projection of 12-13m in 2011. Meanwhile, hotel supply is expected to rise by only 5.1% in FY11. Hence, we believe CDLHT will continue to be the beneficiary of rising ARR and occupancy rates due to demand outstripping supply for hotels.