Ascott Residence Trust (ART SP/HOLD/Target: S$1.42)
Staying in Asia Pacific for the long haul
- Staying in Asia Pacific for the long haul as the state of Victoria (in which Melbourne is located) saw the strongest performance in overnight visitors within Australia, averaging a 7.7% growth p.a in 2010-14.
- The Tourism Research Australia estimates overnight visitor growth in 2016 to hit 6.5%.
- RevPAR for Melbourne grew 4.1% yoy in 2014 and is expected to hit 7.3% growth in 2015, as estimated by hotel tracker STR Global.
- Tokyo is also expected to see RevPar growth hit 4.1% in 2015.
- We note that RevPar in Kyoto saw a remarkable growth of about 14% in 2014.
Issuance of perpetual securities to fund Australia acquisition.
- ART raised S$250m via perpetual securities on 23 June. Of these, S$150m will be used to acquire Citadines on Bourke Melbourne (S$167.6m) and S$136.9m debt will be raised to fund the remaining assets.
Debt creativity led to yield accretion.
- Management guided for a 2.9% accretion in DPU with a blended EBITDA yield of 5.1%.
- trading yield stands at 7%, the leverage effect makes it yield accretive.
- We estimate a hedged yield of around 5.2% for the acquired property portfolio vs ART’s hedged trading yield of 6.7% pre-acquisition (unhedged trading yield 7%).
Gearing approaching uncomfortable levels, factoring in perpetual securities.
- Headline gearing is expected to increase only 1ppt from 38.5% to 39.5% despite a 10.3% increase in aggregate leverage. This is largely due to the usage of perpetual securities that have been classified as equity.
- However, if we classify the S$401m perpetual securities as half debt and half equity owing to the hybrid characteristics between these two classes, it would result in a gearing of 44.2%, which is on the high side relative to peers’.
Downgrade to HOLD
- Downgrade to HOLD with an unchanged target price of S$1.42, based on DDM (required rate of return: 8.3%, terminal growth: 2.0%).
- We maintain our target price as the 2.9% accretion in DPU is offset by the raised risk profile from the relatively higher debt levels after factoring in the perpetual securities (20bp increase in required rate of return).
- Downgrade to HOLD as we see limited upside from current share price levels.
(Vikrant Pandey, Derek Chang)
Source: http://research.uobkayhian.com/
