Ascott Residence Trust - CIMB Research 2016-07-22: 1H16 underscores sluggish growth outlook

ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust - 1H16 underscores sluggish growth outlook

1H16 DPU of 3.88Scts (+1% yoy) was within our expectations, forming 49% of our full-year forecast. 2Q16 DPU of 2.13Scts (+2% yoy) was at 27% of our FY16F.
Driven by acquisitions, RevPAU grew 10% yoy. On a same-store basis, RevPAU was down 5% yoy.
We saw misses from Australia, Belgium, Singapore, Philippines and Vietnam. Japan and Malaysia were the beats.

Brexit implications are mixed at this juncture but downside risk firmly on FX as ART has only hedged 20% of its £ exposure.
Maintain Hold with higher DDM-TP. Its flattish DPU growth profile does not impress.

Owing to properties acquired in 2015 and 2016, 1H16 revenue and gross profit grew 19% and 15% yoy respectively. Similarly, RevPAU increased 10% yoy.
1H16 DPU inched up 1% yoy due to the expanded unit-base.
On a same-store basis, revenue decreased by 6% yoy due to lower revenue from the UK and Philippines (ongoing renovations). Similarly, RevPAU would have been down by 5% yoy.
Lastly, portfolio value was up by 4% (vs. year-end) due to gains from Japan, Spain, UK and the US.

Overall, we saw more misses than hits.
Dragged by Perth, Australia posted a 13% yoy RevPAU decline in 2Q16.
Belgium was affected by the terror attacks in Mar 16.
Singapore was impacted by poorer performance from Ascott Raffles Place.
The Philippines suffered more from ongoing renovations than we projected.
We had also expected Vietnam to do better but corporate demand in Hanoi was weaker. However, Japan stayed solid, recording 9% RevPAU growth.
Margins in Malaysia also rebounded.

RevPAU for China (ART’s largest market) decreased 8% yoy but is on track vs. our forecast (better margins). We expect a flat yoy contribution from China.
In addition, all units in Fortune Garden Apartments have been sold or have letters of intent signed.
Meanwhile, the UK comprise 10% of ART’s total assets and gross profits. The Brexit impact is mixed at this juncture as weaker corporate could be offset by stronger leisure demand. Also, the UK properties are supported by a minimum income.
Risk is on translation as ART has only hedged c.20% of its £ exposure.

Incorporating 2Q16 results, we forecast FY16 DPU to decrease 1.8% yoy as full-year contributions from the acquisitions in the US and Australia are offset by a sluggish Europe and ASEAN, and an expanded unit base from the private placement completed in Mar 16.
In terms of the RevPAU outlook, bright spots can be found in Australia, Japan and Vietnam. However, we expect ASEAN and Europe to stay sluggish, while the Philippines will be affected by ongoing AEIs.

We maintain Hold on ART with a slightly higher DDM target price (S$1.18).
While the stock appears cheap vs. its relative trading band, we are lukewarm on its flattish DPU growth profile, which would likely only take on a steeper gradient when higher macro-GDP growth comes through.
We also think that the market has somewhat priced in the stability that ART offers, with the stock trading at 6.9% CY16 dividend yield vs. the hotel REIT average of 7.3%.

YEO Zhi Bin CIMB Securities | LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-07-22

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 1.18 Up 1.16