• No financials were provided in this business update. 1Q23 gross profit was 59% higher YoY, and 97% of 1Q19 pre-COVID-19 levels. Portfolio RevPAU spiked 90% YoY to S$127 and is at 93% of pre-pandemic 1Q19 pro forma RevPAU.
• 1Q23 effective borrowing cost at 2.4% (4Q22: 1.8%) is still lower than many of its peers.
• Maintain BUY, DDM-TP unchanged at S$1.26. CLAS remains our top pick in the sector owing to its mix of stable and growth income and geographical diversification. The current share price implies a FY23e dividend yield of 6%.

The Positives

• 1Q23 RevPAU grew 90% YoY to S$127 (1Q22: S$67, 4Q22: S$155) and is at 93% of pre-pandemic 1Q19 pro forma RevPAU. YoY improvement was driven by both higher average daily rates (ADRs), which is up c.35% YoY in 1Q23, and higher occupancy of c.70% in 1Q23 (1Q22: 50%, 4Q22:78%). All markets experienced strong RevPAU growth YoY (see Figure 1), with Singapore, Australia, USA, and Japan RevPAU at or above pre-COVID-19 levels. Japan saw a spike in RevPAU by 351% YoY after its re-opening to independent leisure travellers in Oct 2022, with Tokyo properties registering ADRs that surpassed 1Q19 levels. Growth drivers for RevPAU going forward are in China and Vietnam which are currently at 68% and 81% of 1Q19 levels, respectively.

• Extended stay segment remains resilient, comprising c.19% of 1Q23 gross profit. Occupancy of the longer stay properties remained stable at >95%. Student accommodation continues to be resilient with 98% leased for the academic year 2022-2023 (vs 95% last academic year), with rent growth of c.6% YoY. Longer-stay accommodation offers income stability while hospitality assets capture growth from travel recovery.

The Negative

• Higher interest expense. Including capitalised interest, CLAS’s effective borrowing cost increased from 1.8% to 2.4% QoQ, and the percentage of loans on fixed rate decreased from c.78% to c.75%. Gearing increased marginally from 38% to 38.7% QoQ, leaving c.S$1.7bn of debt headroom for CLAS to reach its medium-term asset allocation of 25-30% for longer-stay accommodation (currently at c.19%). Cost of debt is expected to increase further when CLAS refinances 14% of total debt, or about S$400mn, which is due at the end of 2023. A 50bps increase in benchmark rates will impact full-year DPU by 0.1 cents.

Outlook

Forward bookings remain healthy, supported by the strong demand from both international and domestic travel. Corporate travel and business activity continue to be robust, despite some industries facing cost pressures. As of January 2023, global airlines are operating at only 11% of their 2019 capacity levels to and from China. This is expected to increase to 25% by April 2023. China is a key source market for travellers to many countries, and the return of flight capacity is expected to drive outbound travel. In 2019, Chinese travellers accounted for approximately 9% of CLAS’ guest count (about 4% in 1Q23) and we think this percentage will increase in the second half of 2023.

We forecast growth in ADRs to moderate as it has already surpassed pre-pandemic levels in some markets, and the driver for RevPAU growth going forward will be from higher occupancy. CLAS’ revenue growth has outpaced the increase in operating costs – electricity costs have increased, but it remains less than 10% of OPEX.