CIMB Research 2015-07-22: Ascott Residence Trust - Continues to sail. Maintain HOLD.

Continues to sail 

  • ART’s results were in line with our estimates, with 2Q and 1HFY15 DPU accounting for 23% and 45% of our full-year estimates, respectively. 
  • After factoring in the recent acquisitions, associated financing costs and perpetual securities issued, coupled with potential headwinds in some of ART’s key-markets, we maintain our Hold rating with a slightly higher DDM-based target price of S$1.30, as we roll over our earnings estimates to FY16. 

Results in line 

  • Ascott Residence Trust’s (ART) 2Q15 rise in revenue (+12.0% yoy) was mainly the result of additional contributions from the properties acquired in 2014. 
  • At first glance, DPU appears to have dipped by 4.7%, but after stripping out the one-off distribution of S$3.0m in 2Q14, 2Q15’s DPU was 5% higher yoy. 
  • Revenue per available unit (RevPAU) in 2Q15 fell 6% yoy, mainly due to weakness in Singapore and Philippines properties and lower ADR from the properties acquired in 2014. 
  • For countries with management contracts, only Belgium, Australia and Japan demonstrated higher RevPAU as a result of stronger demand, while growth in Spain was mainly due to higher ADR for the renovated/repositioned assets. 
  • China’s RevPAU was lower as a result of ongoing renovations at Somerset Xu Hui and Somerset Olympic Tower. 

Acquisitions boost topline, but marginal impact on DPU 

  • Looking ahead, organic growth is likely to be limited to Japan and Australia assets, while ART’s topline will continue to benefit from the full-year contributions of properties acquired in FY14 and additional contributions from the acquisitions of eight properties that are expected to complete by 3Q15. 
  • Having said that, contribution to DPU may be marginal due to the higher financing costs involved for the funding of these acquisitions. 
  • Upon completion of the acquisitions, leverage is expected to rise to c.39.6% (vs. 38.7% in 1Q15). 
  • As management continues to source for acquisitions, coupled with the new maximum allowable leverage ratio of 45% by MAS, we believe more perpetual securities could be issued when additional acquisitions come through. 

Maintain Hold 

  • In view of high asset valuations, coupled with potential headwinds in some of ART’s key markets, we believe the avenues to boost DPU are limited. 
  • On this basis, we maintain our Hold rating, with sizeable yield-accretive acquisitions and upside surprises in RevPAU being the key re-rating factors.

(PANG Ti Wee; LOCK Mun Yee; TAN Xuan, CFA)