CDL’s Orchard Hotel renovation “fresh and contemporary”

A peek at the ongoing renovation works at Orchard hotel. We visited Orchard Hotel, one of the 2 hotels in CDL HT’s portfolio currently undergoing a phased refurbishment and upgrading exercise involving over 331 guests rooms and common areas, conversion of a presidential suite into 5 executive club rooms and addition of a new club lounge.

During our site visit, our opinion was that the renovated rooms offered a cosmopolitan feel & freshness, compared to the original rooms and furnishings, which looked “tired” after years of usage. Leaving a good first impression on guests is important, as this would have a direct impact on repeat visitations and recommendations. A rejuvenated Orchard Hotel will certainly give it a competitive edge in Singapore.

Underpinning earnings growth momentum in FY11-12F. The refurbishment should progressively complete in the course of 2011, slightly longer than usual in order to minimize disruption to guests and limit impact on earnings. We believe that the refurbishment exercise will underpin the hotel’s longer term competitiveness and that management can “extract more juice” from low hanging fruits.

While we expect CDL HT’s Singapore operations (contributing c83% of topline) to continue to perform strongly over FY11-12 post the facelift, the newly refurbished rooms are also expected to fetch more than 10% in higher room rates, which put the trust in a good position to deliver strong FY11-12 DPU CAGR of 14%.

BUY, TP S$2.30 based on DDM. We remain confident on the trust’s ability to continue growing DPU strongly, forecasting a FY11-12F CAGR of 14%, ahead of its S-REIT peers. The group’s low gearing of c26% post acquisition still remains below management’s optimal level of c40%, which implies an additional debt headroom that may be utilized for opportunistic ventures.