Despite a 24.8% run up in share price in the past three months, we believe price is poised to rise further, supported by expectations of: 1) a 50bps policy rate cut in 4Q24 by the BoT, 2) strong 3Q24F earnings and 3) forecast upgrades by consensus after 3Q24 results. We raise our 2024F by 20.3% to Bt1.7bn (+75.1% YoY) to reflect the stronger than expect performance. This lifts our 2024F DPU to Bt1.24/sh (from Bt1.16) and 2025F to Bt1.26 (from Bt1.19), implying 9.5% and 9.6% yield respectively. We maintain OUTPERFORM with a new DDM-based TP of Bt16.5 from Bt15 (6.5% WACC and no terminal value). LHHOTEL is our top pick in the REITs & IFFs sector.
Research
High Conviction: LHHOTEL - “Grande” prospects ahead
Catalyst #1: Expect BoT to cut policy rate in Oct. After the Fed cut its policy rate by 50bps in Sep, LHHOTEL share price has risen 3.8%, outperforming the SET by 3.3%. The next focus is the BoT’s MPC meeting. INVX expects the BoT to cut policy rate by 50bps in 2024: 25bps in Oct and 25bps in Dec. We believe the rate cut will push down 10-year Thai government bond yield further and will be a near-term catalyst as LHHOTEL is considered a dividend stock, i.e. the lower the bond yield, the more attractive the stock. Historically, LHHOTEL share price has performed well when yield drops (Figure 3).
Catalyst#2: Expect 3Q24F core earnings to grow QoQ and YoY. We expect LHHOTEL to report 3Q24F core profit of Bt428mn, up 3.6% QoQ and 87.8% YoY. The strong YoY growth will reflect revenue from two new assets (Grande Centre Point Pattaya and Grande Centre Point Space Pattaya) acquired in 4Q23. The QoQ growth is seasonal on higher demand from Hong Kong (10% of its customers) and Singapore (5%) due to school breaks. Rental income is estimated at Bt591mn, up 6.9% QoQ and 88.6% YoY. So far, the trust has not seen any negative impact from the stronger baht as all of its hotels are upscale, where currency fluctuations are less of a factor for guests.
Catalyst#3: Consensus expected to upgrade earnings post 3Q24 results. Based on our 3Q24F forecast, 9M24F core earnings will reach Bt1.3bn, 93% of our earlier full-year forecast and 86.6% of consensus. We therefore see a high chance that consensus will bump up their forecasts after release of 3Q24 results. We raise our 2024F core profit forecast by 20.3% to Bt1.7bn (+75.1% YoY) after lifting our occupancy rate assumptions and room rate to reflect stronger than expected performance. (Figure 2) This raises our forecast DPU to Bt1.24/sh in 2024F from Bt1.16 and to Bt1.26 in 2025F from Bt1.19.
Action & recommendation. Although share price has run up 24.8% in the past three months, we believe there is further room for share price to go up as: 1) we are just at the start of the interest rate cut cycle, 2) dividend yield is still attractive at 9.5% in 2024F and 9.6% in 2025F and 3) all assets are high-quality, as proved by the strong performance in 1H24. We see further earnings upside from a lower interest rate as 70% of its debt carries a floating rate. Each 25bps cut is estimated to provide 1.1% upside to our 2025F forecast.
Risks and concerns. 1) Rising bond yield, 2) extraordinary events such as COVID-19,
3) strong 2024F performance may not be repeated in 2025F. Key ESG risks are effective environmental management of greenhouse gases, energy, wastewater, and waste (E).