Why CDLHT's new Maldives asset is not attractive enough

CIMB estimates the deal is small at 4% of asset value.

CIMB analyst said that while it likes CDLHT’s Maldives purchase for its attractive yield and market exposure, the deal is small at 4% of asset value. "This could mark the start of a win-win strategic tie-up but we note the bite-sized nature of Banyan Tree’s remaining existing assets that could appeal."

Here's more from CIMB:

We raise DPUs, factoring in accretion from the purchase, but keep our DDM-based target price on a higher discount rate of 8.0% (previously 7.7%) for a higher beta. We maintain Neutral but will turn more positive on signs of improved acquisition momentum and a meaningful tie-up with Banyan Tree Holdings.

What Happened
CDLHT has entered into a sale-andleaseback of Angsana Velavaru in the Maldives with a subsidiary of Banyan Tree Holdings Limited at US$71m (S$86.8m). The asset will be leased back for a ten-year lease term to Banyan Tree. Rents will be pegged at gross operating profit less management fees, translating to a trailing annualised NPI yield of 9.6% for 9M12. It will be subject to a minimum rent of US$6m, implying a 7.0% yield after outgoings.

The transaction will be fully funded via US$ debt (borrowing cost at ~2%), taking asset leverage to 28.6% from 25.5% before the transaction.

What We Think
This is a long-awaited deal with management having been on the lookout for a while. Positives are a high NPI yield vs. portfolio NPI yield of about 6% for its portfolio, DPU accretion and a reduction in negative cash carry on its under-leveraged balance sheet. Upside could come from villa additions given recent changes in government rulings for higher allowable built-up (as a % of land). That said, we see higher yield compensatory for a shorter remaining leasehold period of 35 years for the property, higher country risks, and the resort business’ more volatile nature.

This deal, while small, would also dilute revenue and asset value contributions from Singapore to 75% (from 80%) and 79% (from 83%), respectively.

What You Should Do
We estimate FY13 DPU accretion of 3.8% but maintain Neutral given the relatively small size of the transaction, with the market likely to remain watchful of its local performance. A strategic tie-up with Banyan Tree could be a win-win, but we note the bite-sized nature of Banyan Tree’s remaining assets in Maldives and/or with 100% equity interest.