Target price Reduced from 1.95 - SGD 1.74
Closing price September 27, 2013 SGD 1.62
Value is emerging
Action: Upgrade to Neutral; value is emerging
CDREIT has underperformed the other REITs year to date (-13.8% vs. FSTREI’s -5.6%) and we believe value is emerging. Our estimates suggest CDREIT offers a reasonable return over the long-term risk-free rate even if we were to assume long-term cost of debt and all management fees to be paid in cash. Its balance sheet is also relatively lowly geared at 0.3x as of end-June. Upgrade to Neutral on valuation.
Catalyst: RevPAR support likely in 2014F
Our estimates suggest the new supply of hotel rooms is likely to be significantly less at just over 1,600 rooms in 2014F, compared to the projected bumper supply of over 4,200 rooms in 2013F. This, coupled with a potentially weaker SGD, could lend support to CDREIT’s hotels’ RevPAR, in our view.
Valuation: TP cut to SGD1.74 (from SGD1.95)
We cut our TP to SGD1.74 (from SGD1.95) to chiefly reflect: 1) a lower NAV estimate of SGD1.69 (from SGD1.88, on 50bps increase in cap rates for SG assets), and 2) a lower FY14F DPU forecast of 11.4Scts (from 11.9Scts). As a cross-check, our current TP translates into a P/B multiple of 1.1x based on end-June book value of SGD1.60, which represents a discount to the average multiple of 1.2x CDREIT has traded at since 2006. Given the likely slower growth in the Singapore hospitality sector in FY13- 15F, the discount could be justified, in our view.
Our TP of SGD1.74 implies a potential total return of 14.4% (potential upside of 7.4% + FY14F yield of 7%). Value is emerging, in our view, and we upgrade our rating from Reduce to Neutral.
Publish date: 02/10/13