Ascott Residence Trust - CIMB Research 2016-10-21: Continued headwinds

ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust - Continued headwinds

3Q/9MFY16 DPU of 2.15/5.85 Scts within expectations and forming 27%/75% of our full-year forecast.
Driven by acquisitions, 3Q REVPAU rose 2% yoy. On a same-store basis, REVPAU was down 11% yoy.
Singapore, Belgium, China, Philippines, the UK and France delivered poorer performance, offset by acquisition growth in Australia and strong US showing.

3QFY16 revenue and gross profit grew 9% and 4% yoy respectively, thanks to additional revenue from new acquisitions made in 2015 and 2016.
Portfolio REVPAU improved 2% yoy, driven by inorganic growth. However, on a same-store basis, 3Q REVPAU would have declined 11% yoy owing to weaker demand in China, AEI in the Philippines and weaker £. 3Q DPU of 2.15 Scts was flat yoy and made up 25% of our FY16 estimates.

Overall, we saw weaker performance from France due to negative indexation under the master lease while China saw weaker demand from project groups in regional cities and depreciation of the RMB vs. S$.
Belgium remains sluggish in the wake of the terror attacks this year.
Philippines was impacted by ongoing AEIs.
Singapore continued to see poorer corporate demand.
Post Brexit announcement, UK was affected by a weaker £ even as occupancies were greater than 80% with demand from corporate travellers.

The weakness was offset by a better showing from Australia, thanks to contributions from Citadines on Bourke Melbourne while Indonesia benefited from cost savings.
US hotels, the largest contributor at 20% of revenue and 10% of gross profit, enjoyed high occupancy of over 90% and delivered qoq growth.
Vietnam saw higher qoq revenue due to higher rent and almost full occupancy at the office component of its property.

Looking ahead, inorganic expansion would likely continue to drive earnings growth.
Apart from potential acquisitions in Australia, Japan, Europe and the US, the Ascott Orchard Singapore is also in its acquisition pipeline. The property was recently completed and could potentially be purchased in 2017 and could expand ART’s AUM to S$5.3bn. However, with a current gearing of 41%, close to the guideline ceiling of 45%, we think the trust would have to look at a combination of equity/quasi equity and debt funding. We have not factored this into our current estimates.

We maintain a Hold on ART with an unchanged DDM-based target price of S$1.18.
ART is trading at 6.9% FY16 DPU, below the average of 7.1% yield of hotel REITs, indicating that the market could have priced in the stability of ART’s longer dated lease structures.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2016-10-21

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