High Conviction : LHHOTEL 3Q24: Results a “Grande” achievement

The recent slip in share price following rising US bond yield is a buying opportunity as we view any further rise from this level is limited. We also expect the Fed to continue to cut rates. We stay OUTPERFORM with an end-2025F DDM-based TP of Bt16.5 (6.5% WACC and no terminal value). LHHOTEL is our top pick in the REIT and IFF sector.

Catalyst #1: 3Q24 results beat expectations. LHHOTEL reported net profit of Bt540.6mn, up 44.2% YoY and 1.8% QoQ. In the quarter, it booked Bt74.9mn gain on change in fair value of investment (non-cash). Stripping this out, core profit was Bt465.6mn, up 104.3% YoY and 12.8% QoQ and 8.8% above INVX due to lower cost than expected. Rental income was Bt599.5mn, growing 91.3% YoY and 8.4% QoQ. The strong YoY growth was due to higher rental income after bringing in two additional projects in 4Q23, Grande Centre Point Pattaya and Grande Centre Point Space Pattaya. Existing projects also grew in line with growing international tourists. 9M24 core profit accounted for 79.7% of our full-year forecast.

Catalyst#2: Upside to our full-year forecast. Since 9M24 core profit accounted for 79.7% of our full-year forecast and we expect core profit to grow YoY and QoQ in 4Q24F due to seasonality, we see upside to our 2024F earnings and dividend forecasts. We will revisit our assumptions once we see more clarity on its 4Q24F outlook. Additionally, we also see potential for earnings upgrades by consensus as its 9M24 core profit accounted for 81.5% of consensus forecast.

Catalyst#3: Further rally in US bond yield should be limited. Share price fell 4.5% in the past one month after 10-year US government bond yield increased to 4.4% from 4.1% in response to investor concerns over potentially higher inflation from Trump’s polices. However, we see further increases in US bond yield as limited. INVX expects US inflation to continue declining and anticipates further rate cuts by the Fed. In contrast, the 10-year Thai government bond yield has decreased to 2.4% from 2.5% in the same period. Therefore, we view the recent drop in LHHOTEL share price as a buying opportunity.

Action & recommendation. We maintain our positive view on LHHOTEL as the trust will benefit from tourism recovery and the rate cut cycle is only just beginning. Its dividend yield is decent at 9.8% in 2024F and 9.9% in 2025F. IRR is also attractive at 9.1%. Lastly, all assets are high quality as reflected in the strong performance in 9M24.

Risks and concerns. 1) Rising bond yield, 2) extraordinary events such as COVID-19, 3) strong 2023 performance may not be repeated in 2024F. Key ESG risks are effective environmental management of greenhouse gases, energy, wastewater, and waste (E).