CDL Hospitality cut to Reduce by Nomura as bullish views are priced in

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Nomura downgraded CDL Hospitality Trusts to Reduce from Neutral, saying the valuation remained rich despite the unit’s pullback so far this year.

CDL Hospitality’s valuations are pricing in a 25 percent increase in variable rental income from its Singapore hotels and an additional 0.6 Singapore cent per unit in distribution from further acquisitions of S$200 million which are fully debt funded, Nomura said in a note on Monday.

“We think both assumptions could be optimistic,” it said.

It noted that while the 0.6 Singapore cent distribution per unit (DPU) accretion is “achievable on paper,” the unit’s DPU fell from 10.2 Singapore cents in 2010 to 9.2 Singapore cents in 2017 despite the portfolio value expanding by 53 percent over the period.

“We therefore think a more cautious stance is warranted, given the fairly bullish assumptions that are seemingly priced,” it said.

For 2018, Nomura raised its DPU forecast to 9.75 Singapore cents from 9.16 Singapore cents previously on changes to the portfolio, including two acquisitions in Europe and the U.K. and the sale of two assets in Brisbane, paring borrowings with divestment proceeds and paying out half of divestment gains to unitholders.

But it cut its target price to S$1.40 from S$1.54 on its forecast for 2019 DPU of 9.45 Singapore cents and its 2019 target yield of 6.8 percent, up from 6 percent, in line with a higher yield on the 10-year bond.

“A potential negative catalyst in the near term for the stock could be a weaker-than-expected set of second-quarter 2018 numbers, which we expect to be reported in late-July,” Nomura said.

The unit was trading flat at S$1.57 at 10:37 A.M. SGT on Monday.