Brokers' take: UOBKH upgrades CDL Hospitality Trusts to 'buy', positive on global Covid recovery

THOUGH the United Kingdom is currently in the eye of an Omicron variant storm, UOB Kay Hian (UOBKH) is positive that the country will see recovery resume in the second quarter of 2022, driven by domestic and intra-regional corporate and leisure travel.

UOBKH analyst Jonathan Koh noted that while new Covid-19 cases have skyrocketed in the UK, deaths have trended lower. Studies conducted in England and Scotland have also suggested that hospitalisation rates are much lower for Omicron compared to the Delta variant.

As such, Koh believes that Hilton Cambridge City Centre and The Lowry Hotel - both managed by CDL Hospitality Trusts (CDLHT) J85 - will eventually see rapid recovery after the UK weathers the Omicron wave.

In a research note on Tuesday (Jan 4), he upgraded his call on the stapled group to "buy", and raised its target price to S$1.42 from S$1.24 previously.

Aside from the UK, Koh is also positive that global Covid recovery will continue in 2022, as countries gradually reopen international borders.

On the home front, he believes Singapore will continue to reopen its international borders by expanding the capacity of the existing quarantine-free vaccinated travel lanes (VTL), and opening new ones.

While the government has chosen to scale down capacity for VTLs by air and land in January in the light of the Omicron variant, Koh expects the anticipated recovery of the hospitality industry here to only be delayed to 2H 2022, and not derailed .

Elsewhere, Koh noted that new Covid-19 infections have started to decline in Germany since December, after a spike in cases at year-end.

He expects CDLHT's Pullman Hotel Munich to benefit from meetings, incentives, conferencing and exhibitions (Mice) demand in 2022, such as the Oktoberfest in Munich taking place in September.

CDLHT is also expected to continue benefiting from stable contributions from Grand Millennium Auckland, which has served as a managed isolation facility since Q2 2020, as its government contract is expected to continue into the first quarter of the year.

The hotel, which is the largest in Auckland and centrally located within the central business district, contributed 29.6 per cent of net profits interest in Q3 2021.

That being said, one downside Koh anticipates for the Reit is a bumpy transition for CDLHT's Singapore hotels out of serving as isolation facilities as self-isolation and recovery at home becomes the default arrangement.

CDLHT has 5 hotels under government contracts to serve as dedicated isolation facilities, and the government may move to terminate some of these contracts moving forward, he said.

"The affected hotels have to switch to serving transient corporate and leisure travellers and staycation demand," said Koh.

Nevertheless, he noted that there is downside protection as the 5 hotels are under master leases, which provide minimum fixed rents totalling S$31.4 million per year.

This translated to 80 per cent of revenue from the 5 hotels in 2020, he noted.

CDLHT's stapled securities were trading S$0.01 or 0.8 per cent lower at S$1.19 as at the midday break.