DBS Group Research 2015-07-16: Ascott Residence Trust - DIVERSIFICATION BREEDS STRENGTH. Maintain BUY.

DIVERSIFICATION BREEDS STRENGTH 


Diversified portfolio underpins resilience. 

  • We maintain our BUY recommendation on ART with S$1.38 TP. 
  • Amid the volatility in the Singapore hospitality market, we believe ART’s diversified portfolio with serviced residences and rental housing located across 14 countries in the Asia Pacific, Europe and US, provides investors with a resilient and growing DPU. 
  • ART’s resiliency and cashflow visibility also comes from having 40-50% of its income sourced from master leases and management contracts with minimum guaranteed income. 


Crystalling value from recent acquisitions and AEIs. 

  • ART has announced c.S$984m worth of acquisitions over the last 18 months, increasing total AUM by c.30% to S$4.6bn. 
  • Combined with completed and ongoing AEIs worth c.S$95m, ART should start to fully realise the benefits from these expansion plans over the next few years. 
  • We estimate that ART will manage to deliver a 3-year (FY14-17) DPU CAGR of 6%. 

Assets divestments to strengthen balance sheet. 

  • While ART’s headline gearing of c.40% is comfortable, we are mindful of ART’s adjusted gearing (treating 50% of perpetual securities as debt) which stands at 43-44%. However, we understand this is temporary, as ART is reviewing its portfolio mix and looking to divest some of its lower yielding properties. 


Valuation: 


Delivery of DPU growth to close valuation gap. 

  • We believe delivery of DPU growth following the disappointment over the drag from the rights issue on FY13-14 DPU, will help close the discount to our DCF based TP of S$1.38. 
  • With projected 1-year total return of 12% (5% capital upside with 6.7-7.0% yield), we reiterate our BUY recommendation. 


Key Risks to Our View: 


Oversupply and currency volatility. 

  • The key risk to our call is potential oversupply in ART’s key markets as well as impact from currency volatility. 
  • These risks are mitigated by ART’s diversified portfolio with no country contributing more than 20% of group NPI. 
  • In addition, ART has already hedged the majority of its EUR and JPY income this year at above 1.60 and below 88 respectively. 


Potential Catalyst: Delivery of earnings and further acquisitions 
Where we differ: Our DPU esimates are higher than consensus as we have included ART’s recently announced acquisitions.

(Mervin SONG CFA, Derek TAN)

Source: http://www.dbsvickers.com/




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