Ascott Residence Trust - DBS Research 2017-04-24: Overhang Done and Dusted

Ascott Residence Trust - DBS Vickers 2017-04-24: Overhang done and dusted ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust - Overhang done and dusted

  • 1Q17 DPU of 1.51 Scts (-14% y-o-y) below expectations.
  • Lower contribution from Japan, Australia and UK in local currency terms, and EUR and GBP depreciation.
  • Reduce FY17-18F DPU by 11-15% due to recent rights issue but stock overhang now removed.



Overhang removed. 

  • We maintain our BUY recommendation on Ascott Residence Trust (ART) with a revised TP of S$1.16. ART’s share price performance had been muted due to the potential equity raising for the acquisition of Ascott Orchard Singapore for S$405m in 2017. 
  • With the rights issue to fund this acquisition now completed, we believe the overhang on the stock has been removed, which should trigger a re-rating as ART stages a recovery in DPU next year.


Value from recent acquisitions/AEIs yet to be fully realised. 

  • ART announced c.S$1.6bn worth of acquisitions over the last three years, increasing the value of its assets under management (AUM) by c.40% to c.S$5.3bn. 
  • Combined with completed and ongoing asset enhancement initiatives (AEIs), ART should progressively realise the benefits over the next few years.


Gearing concerns addressed. 

  • ART’s headline gearing of c.40% was previously a concern for some investors. However, with the recent S$443m rights issue and execution of its strategy of disposing several of its lower yielding properties (e.g. disposal of several rental housing properties in Japan earlier this year), concerns over its gearing should now be addressed with ART’s gearing projected to drop to 36-37% by end 2017.


Valuation

  • After incorporating the acquisition of Ascott Orchard Singapore and two German properties, disposal of several Japanese rental housing properties and the recent rights issue, we lowered our DCF-based TP to S$1.16 from S$1.23.


Key Risks to Our View

  • Oversupply and forex volatility. The key risk to our call is potential oversupply in ART’s key markets as well as impact from forex volatility. 
  • These risks are mitigated by ART’s diversified portfolio, with no country contributing more than 20% of the group’s net property income




Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-04-24
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.16 Down 1.280



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