Ascott Residence Trust - CIMB Research 2016-06-28: The good, the bad & the 'ugly'

Ascott Residence Trust - CIMB Research 2016-06-28: The good, the bad & the 'ugly' ASCOTT RESIDENCE TRUST A68U.SI 

Ascott Residence Trust - The good, the bad & the “ugly”

  • We take a deeper look at ART, which reinforces our non-consensus Hold call.
  • The good: Serviced Residences (SRs) a resilient accommodation model; ART provides income stability for its unitholders through master leases and mgmt contracts with guaranteed income.
  • The bad: We laud ART’s drive to grow its AUM and scale. However, DPU growth has not moved in lock-step with its asset expansion due to its gearing.
  • The “ugly”: Exposure to UK and Europe could serve as an overhang on the stock.
  • Reworked our model, trimmed our FY16-18 DPU but target price nudged up.

The good: ART provides exposure to SRs & offers income stability

  • ART provides unique exposure to the corporate long-stay segment through its serviced residences (SRs) in key cities across Pan-Asia. With increased awareness of the value proposition of SRs, we think that secular demand trends remain intact. Additionally, ART provides income stability as 46% of its FY15 gross profits are derived from master leases and management contracts with minimum income.

The bad: DPU growth not moving in lock-step with AUM expansion

  • Although we laud ART’s drive to grow its AUM (to S$6bn (US$4.4bn) by 2017), that has not been accompanied by DPU growth. Its high gearing (current: c.40%) meant that acquisitions were backed by a mixture of equity and debt, resulting in moderate DPU accretion. 
  • Examining its acquisition pipeline (US properties and Ascott Orchard), we found that these assets would only result in mild DPU accretion for unitholders.

The “ugly”: exposure to UK & Europe

  • Brexit has cast uncertainty over ART’s properties in UK (c.12% of AUM) and Europe (c.15%). Since Brexit, the GBP and euro have lost c.11% and c.2%, respectively, against S$. ART does not hedge its GBP-sourced income while about 70% of its € income is hedged. Hence, near-term risk is mainly from translation losses on the foreign- sourced income. 
  • Every theoretical 10% devaluation in GBP and € vs. S$, coupled with a 10% appreciation in US$ vs. S$, could result in a net 2% decrease in ART’s FY16 DPU.

Expect flat FY16 DPU growth

  • We project flat FY16 DPU growth as full-year contributions from the acquisitions in the US and Australia are offset by sluggish Europe, ASEAN and an expanded unit base from the private placement completed in Mar 16. In terms of RevPAU outlook, bright spots can be found in Australia, Japan and Vietnam. 
  • However, we anticipate a sluggish ASEAN and Europe while the Philippines will be affected by ongoing AEIs. We expect its largest market, China, to only post 1% RevPAU growth.

Reiterate our non-consensus Hold on ART

  • We take a deeper look at ART, which prompts us to keep our non-consensus Hold on the stock. Our FY16F DPU is c.6% below consensus. 
  • Overall, with the stock yielding 7.3% for CY16 vs. the hotel REIT average of 7.7%, we think that the market has also somewhat priced in the stability that ART offers. 
  • Lastly, we rework ART’s model, trimming our FY16-18F DPU but raising our DDM-based target price (to S$1.16).

YEO Zhi Bin CIMB Securities | LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-06-28
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 1.16 Up 1.14