Ascott Residence Trust - DBS Research 2016-04-18: Unfulfilled potential

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ASCOTT RESIDENCE TRUST A68U.SI 

Ascott Residence Trust - Unfulfilled potential 

• 1Q16 DPU of 1.75 Scts (-1% y-o-y) below expectations. 
• Expect sequential uplift and boost from recent New York acquisition ahead. 
• Trim FY16-17F DPU by 3% each to account for impact from recent terrorist attacks in Belgium, Brexit referendum and weaker British Pound. 

Diversified portfolio underpins resilience. 

• We maintain our BUY recommendation on ART with revised TP of S$1.28. 
• 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 the US, provides investors with a more resilient DPU profile. 
• 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. 

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

• ART has announced c.S$1.2bn worth of acquisitions over the last 18 months, increasing total AUM by a third to S$5bn. 
• Combined with completed and ongoing AEIs, ART should start to fully realise the benefits from these expansion plans over the next few years. 

Assets divestments to strengthen balance sheet. 

• While ART’s headline gearing of c.39% is comfortable, we are mindful of ART’s adjusted gearing (treating 50% of perpetual securities as debt) which stands at 42-44%. 
• However, we understand this is temporary, as ART is reviewing its portfolio mix and is looking to divest some of its lower yielding properties. 

Valuation: 

Consistent delivery to close the valuation gap. 

• Following the disappointment over the impact of the rights issue in 2013 and difficulties faced by some of ART’s Chinese properties on its DPU over the past two years, we believe a more consistent DPU delivery trend will help close the discount to our revised TP of S$1.28. 

Key Risks to Our View: 

Oversupply and FX volatility. 

• The key risk to our call is potential oversupply in ART’s key markets as well as impact from FX volatility. 
• These risks are mitigated by ART’s diversified portfolio with no country contributing more than 20% of group NPI. 

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-04-18

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.28 Down 1.33