Ascott Residence Trust - OCBC Investment 2016-01-27: Lower FV but still a BUY

Ascott Residence Trust - OCBC Investment 2016-01-27: Lower FV but still a BUY REIT ASCOTT RESIDENCE TRUST A68U.SI 

Ascott Residence Trust: Lower FV but still a BUY 

 4Q15 DPU down 4.2% YoY 
 Portfolio RevPAU grew 17% YoY in 4Q15 
 Cheap discount to NAV 

4Q15 results within our expectations 

  • Ascott Residence Trust (ART) reported its 4Q15 results which came in within our expectations. 
  • Revenue grew 25.5% YoY to S$119.2m, driven largely by additional contribution from acquisitions made in 3Q15 and 4Q14, coupled with a slightly better operating performance from existing properties. 
  • However, DPU decreased by 4.2% to 2.07 S cents. If we adjust for one-off items in 4Q14, ART’s adjusted DPU would instead have increased by 17.6% YoY. 
  • For FY15, revenue rose 17.9% to S$421.1m, while DPU fell 2.6% to 7.99 S cents. Both figures formed 99.1% of our full-year forecast. 

Improvement in portfolio RevPAU 

  • Encouragingly, ART’s portfolio RevPAU jumped 17% YoY to S$145 in 4Q15 due partly to recent acquisitions. 
  • Excluding these acquisitions, its RevPAU still increased 2% YoY as a result of stronger performance from its assets in China, Indonesia and Vietnam. 
  • On a full-year basis, ART’s FY15 RevPAU increased 4% to S$133. 
  • Looking ahead, management remains cautious on the near-term prospects of Singapore, given the upcoming new supply. 
  • Nevertheless, it remains positive on growth in Tier-1 cities in China, which should help to offset weakness in the Tier-2 cities. 
  • Other countries which are expected to perform well include Japan and Vietnam, while Europe is seeing a slow recovery. 

Maintain BUY, albeit with a lower fair value 

  • We trim our FY16 DPU forecast by 2.9% on account of a slight 1.2% reduction in our revenue projection and a lower gross profit margin assumption in our model. 
  • We also switch our valuation methodology from a RNAV model to a dividend discount model (cost of equity assumption: 7.8%; terminal growth rate: 1.5%), which is the more commonly used valuation metric within our S-REITs coverage. This results in a dip in our fair value from S$1.44 to S$1.28. 
  • Nevertheless, we are reiterating our BUY rating on ART, as we believe valuations are attractive. 
  • The stock is currently trading at 0.77x FY16F P/B, which is 1.8 standard deviations below its 5-year average of 0.89x. 
  • Prospective yield of 7.4% comes in at close to half a standard deviation above its 5-year mean of 7.2%.

Wong Teck Ching Andy CFA OCBC Securities | 2016-01-27
OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 1.28 Down 1.44