Wednesday, August 5, 2020

Why You Should Be Accumulating Hospitality Stocks Now Rather Than Later

Hospitality stocks such as CDL Hospitality Reit has been heavily ravaged throughout the entire period of the pandemic.

The unprecedented impact on the global economy due to the Covid-19 pandemic, which led to an initial global close down and the few weeks of a circuit breaker, has never before been seen in the human history of mankind. 

This shock factor leads to the rapid market crash back in March which accentuated the problems due to the debt-heavy fuelled model with cheap liquidity over the last 10 years since the GFC days.

During a pandemic event like this, naturally, industries such as airlines, cruises, retails, and hospitalities become a casualty as tourism fled countries and people shy away from temporarily flying to these hot-spot areas.

As a result, this causes businesses to fail, hotel occupancies to rise (that leads to a drop in the unit economic ARPU) and jobs are lost.

In fact, since the start of the year (as a matter of case using CDLHT as an example), the company has fallen by more than 60% from the peak to the trough since the start of the year. The stock has recently rebounded off the low but is still down by more than 40% since the start of the year.

So why should investors accumulate hospitality stocks now rather than later, perhaps when the sky is clearer or when international gateways are allowed to reopen.

First, because of the magnitude of the drop.

Dropping from the peak to the trough by more than 60% for a temporary once-in-a-lifetime event like Covid-19 is a little overreaction from the market. In fact, I would argue that events like this are not exactly once in a lifetime because the world has gone through the Spanish Flu, SARS, and MERS outbreak, and each time these companies are able to revamp and bounced back stronger. 

Heavy asset industries such as airlines and companies with weaker balance sheets might face a harsher outlook because they have to revamp the whole organization and put on strong covenants in place. But stronger companies with good fundamentals and a decent balance sheet would usually prevail from the crisis.

The strong companies will get stronger as they try not just to heal their wounds from the crisis that hit them but also emerge stronger by eliminating weaker players in their competitive domain areas.

Second, most people often forget that stocks are longer duration assets.

If CDLHT (as a case used again as an example) drops 60% from its peak in a market crash, that would wipe out 60% of its market capitalization, which means at the current 15x earnings multiple, the market has just subtracted more than 7 years of future profits worth from the valuation. 

Or you can read it as the market has priced in permanent damage at future 15x earnings multiple from, say the original 25x.

That is not true - because we know the damage of Covid-19 to the business is not permanent.

In fact, most of the hotel operations have started to commence in Q3, opening up to local domestic consumption. The increased earnings from the domestic consumption would push the earnings multiple lower or higher share price at the same earnings multiple.

Third, Covid-19 is a priced-in event.

A priced-in event is an event that the market has already discounted for in their market distribution because of an initial shock from heightened emotion and unexpected shift in investor's asset allocation.

In other words, the repeated voyeur of daily increase cases around the globe that we always see on television or social media has little to no effect on the volatility of the market movement of the share price anymore.

The market would only react negatively only if there is a new unknown event hitting the news. 

Second-wave is not a new unknown event because everyone already is expecting it. But a second-wave with new economic closures would throw off all bets. But I think the risk of that happening would be low.

As a case for reference, the Gfc in 2008 lasted about 17 months and the market bottomed in the early half of 2019 and strongly rebounded and took off from there never looking back despite the persistent damage and uncertainty on the economy. 

Because of this, the risk-reward might tilt towards a recovery mode more than the other way round, and this is one of the reasons why I have been slowly accumulating recovery plays such as retail, hospitality, cruise, and transportations.

Disclosure: Author is vested on CDL Hospitality Trust

Thanks for reading.

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  1. Agree with you that it is already priced in. But I think better play for hospitaly industry would be tech stocks that deal with hospitality like Tripadvisor.

    They will benefit fully from the revival of hospitality industries but yet will not incur the same costs which hotels would have to deal with such as massive rents/manpower etc.

    What do you think?

    1. Agree! I think Tripadvisor and Booking made a great compelling case, though I do feel that even in that space the barriers to entry in that area is low. Would have to read more on this area of space to make a compelling long term investment.

    2. Thank you for the reply :)

      I'm an avid follower of your blog and always enjoy your content.
      Definitely agree with you that there are many of these hospitality tech companies springing out of no where.

      take care:D

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  2. uncle168,

    the problem is reits borrow a lot of money backed by their over valued property portfolio

    a lot of reits are devaluating their property assets

    it is a matter of time before the banks ask the reits to sell their assets to repay their debt

    the worst is it used to be more than 1 million tourist visit us each month now drop to 2k how the hotel ever will make money again?

    that is why uol never turn its its hotels into reits as it is flooded with cash from retained earnings while reits have no retained profit nor cash

    it is likely when covid is ovee there will be no reits left listed on sgx as most would be forced to sell their property to uol for next to nothing


    1. Dear KKK
      This is an utterly ridiculous and baseless comment. I would strike this off.
      "it is likely when covid is ovee there will be no reits left listed on sgx as most would be forced to sell their property to uol for next to nothing"
      best wishes

  3. Hey B - Have you increased your holdings of CDLHT significantly, since the last reported 39,000 shares? I have a big chunk, and wondering if still makes sense to add.
    Anon Andy

    1. Hi Andy

      I have unfortunately not increased my holding significantly yet for CDLHT. Am looking around for similar plays like this but more in the space of other owned and franchisee models in the US which is a very similar theme to this.

      Hyatt, for instance, announced its recent Q2 results and the CEO mentioned that they have ample cashflow to tide them through the next 30 months. Generally, I'm looking for ample strong balance sheet to tide them through like this first. For the longer term though, I think it goes back to the model in question.

    2. I think it is better to get another hospitality trust to diversify.

  4. uncle168,

    reits thrived under fed low interest rate when asset prices soar to infinity and beyond

    this lead to an over supply of over valued properties globally

    it is so easy to borrow for next to nothing and buy a property at highly inflated price with a promise by the seller to leaseback at annual escalated rental

    it was a wet dream waiting to become a nightmare

    the local banks bad loan haven't really kicked in yet as the gov allow deferment til the end of the year kicking the can down the road

    but now interest is zero if you reduce it further it become negative

    with negative interest rate, anyone can buy property for free who would want to rent?

    more likely reits would become zombie property companies like the shipping trust paying zero dpu for decades as banks also don't want to forclose their assets as nobody wants to buy

    a new law to pay in scrip dividend maybe enforce for banks and reits to keep the dream alive so these zombies would just see their share price drifting lower and lower for decades to come as pension funds all go bankrupt as how to find returns for retired baby boomers in the post covid negative interest rate world?

    you are right reits would remain listed as zombies much like what happened to the shipping trust like rickmers and the only one left fsl trust when rental and the value of their assets plunged but their debt level remains the same

    thw banks would keep the reits alive to avoid writing off trillions of bad loans to reits

    in reality banks don't make money

    they just use depositors money to pay dividend and create an illusion of profit by lending more depositor money to borrower who can't repay by asking them to borrow even more like sia and sembmar

    even the glove makers when a vaccine is ready they will be stuck with massive over production capacity many will go bankrupt and glove prices would collapse

    even if covid is over the over supply of property assets would mean depress prices for decades

    there will be no dividend yield as there is no cash to pay dpu


  5. uncle168,

    we live in a era where the number of old people outnumber the young people

    this means more people drawing on pensions than paying tax

    this leads to countries printing money to pay for welfare and hence money becomes worthless over time but yet there is no economic growth as less people is working and more retiring

    the last innovation steve jobs iphone iasted for 15 years in technology growth has fizzled out

    stagflation and deglobalisation resulted from the side effects of capitalism would zombified global economies

    we will in this era of negative interest rate and no growth for a long long time

    the death rate will keep increasing and birth rate keep dropping globally

    stuctural unemployment with so many degree holders doing jobs like food delivery would cause political upheaval in many developed countries

    climate change can also mean multiple pandemic running concurrently as polat cap melt unleashing century old virus


    1. Hi Uncle

      Wah seems like doomsday is coming.

      Where do you put your money in this case?


      6 years ago say Reits will become worthless. Now still saying reits will be worthless. Yawn. Not tired of being wrong your whole life meh lame.

    3. uncle168,

      my sti target was reached a long time ago had noble, cosco and all the other sti component stock had not been replaced by reits

      you see the sti had ran out of stocks to replace itself

      sti road to 1,444 is cuming

      best to put money in posb savings account and cpf account at least its safe with zero returns in a world of negative interest rate and a soon to come market crash when trump loses the us elections


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  8. Hi, can you explain how do you derive at a "7 years of future profit worth from valuation"?

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