Ascott Residence Trust (ART SP) - UOB Kay Hian 2016-10-14: Leveraging On Disruptive Technology

Ascott Residence Trust (ART SP) - UOB Kay Hian 2016-10-14: Leveraging On Disruptive Technology ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust (ART SP) - Leveraging On Disruptive Technology

  • Investor queries revolved around the impact of disruptive technology, potential acquisitions and hedging policies. 
  • We opine that ART can leverage on CapitaLand’s tie-up with online rental service provider Tujia. 
  • On Airbnb, management reiterated that its clientele is mainly corporates, which tend to be less price sensitive than leisure travellers. 
  • We note that limited debt headroom would imply equity fund raising and asset recycling to underpin acquisition-led growth. 
  • Maintain BUY. Target price: S$1.37.


WHAT’S NEW


Leveraging on disruptive technology. 

  • Management of Ascott Residence Trust (ART) noted parent group CapitaLand’s recent foray (S$122m investment) into disruptive technology in its announced tie-up home-rental platform Tujia, China’s answer to Airbnb.
  • We reckon this could allow ART to leverage on Tujia’s global reach (about 430,000 listings in China, Bangkok, Singapore, Tokyo and South Korea) and expertise to scale up its online presence, enhancing its booking platform and back-end support.

Impact from Airbnb. 

  • Management noted that its key focus has been on its corporate clientele while Airbnb typically caters to the more price-sensitive leisure market. ART’s serviced residences and hotels also provide security, concierge services and F&B outlets which private homes lack, with higher appeal to corporates than leisure travellers.

Limited debt headroom implies asset recycling and equity fund raising. 

  • Given that debt headroom remains limited (gearing at 41%), equity fund raising to finance the potential acquisitions is quite likely. 
  • We also do not rule out capital recycling through potential divestments of non-core assets. This could likely include rental housing assets in Japan (six were divested last year), underperforming China assets or even assets in France with expiring master leases.

To support potential acquisitions 

  • Management had previously highlighted the likelihood of footprint expansion in the US. 
  • In Europe, we note that the sponsor Ascott Ltd has been acquiring assets in Germany and Paris, which we reckon could require 6-9 months to see performance stabilise before potential injection of these assets into ART.

Hedging policies. 

  • ART has hedged the bulk of its euro and yen exposure for 2016, which account for about 39% of 1H16 gross profit. Management had previously alluded to a 70-80% hedge of its euro and yen income. 
  • We opine management could also be looking to start hedging its British pound income (nearly 11% of 1H16 gross profit) for 2017, given that the pound has since reached historic lows against the S$. Income hedges are typically entered into on a 12-month basis.

Master leases expiring end-17. 

  • Four of its 17 master-leased assets in France (10.8% of portfolio value) are up for renewal (for another nine years) by end-17. These represent 42.7% of 2015 master lease rental income and about 7% of total revenue. Management had previously stated that it will be entering negotiations to renew these leases in 1Q17.
  • Given the recent volatility in Europe (Nov 15 terror attacks in Paris), we reckon terms entered into could be less favourable. As mentioned, we also opine a few of these French assets could be divested for capital recycling.


EARNINGS REVISION/RISK

  • We retain our earnings estimates.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$1.37, based on the two-stage dividend discount model (required rate of return: 7.7% and terminal growth rate: 1.7%).


SHARE PRICE CATALYST

  • Better-than-expected RevPAU increase from AEIs.
  • Yield-accretive acquisitions.




Derek Chang UOB Kay Hian | Vikrant Pandey UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-14
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.37 Same 1.370



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