Ascott Residence Trust - OCBC Investment 2017-01-25: Diversified hospitality play

Ascott Residence Trust - OCBC Investment 2017-01-25: Diversified hospitality play ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust - Diversified hospitality play

  • Excluding one-off items, DPU down 4%.
  • Inorganic growth remains important.
  • Lower cost of equity.

FY16 results in line with expectations 

  • Ascott Residence Trust (ART) posted results in line with our expectations. 
  • FY16 revenue increased 12.9% to S$475.6m (98.2% of our forecast), boosted by a S$75.9m contribution from FY15/FY16 acquisitions and partially offset by a decrease in revenue from 3Q15 divestments and from existing properties. 
  • DPU rose 3.5% to 8.27 S cents (103.2% of our full-year forecast), boosted by a one-off net realized exchange gain of S$8.8m. Excluding one-off items, ART’s adjusted DPU came up to 7.73 S cents (-4.1% YoY). 
  • FY16 RevPAU climbed 5% to S$140; on a same-store basis, excluding the 2015 and 2016 acquisitions, RevPAU fell 7%.

Asset recycling and acquisitions still key 

  • Our channel checks in Singapore have relayed that, given the uncertainty surrounding Trump’s economic policies, some foreign corporates (USbased and otherwise) are taking a wait-and-see approach when it comes to making business decisions and investments. 
  • Looking forward to 1H17, we believe inorganic growth and well-timed divestments remains an important strategy for hospitality REITs as serviced residence demand looks to be affected by cautious attitude of corporates, at least until further policy certainty. 
  • For ART, we note that Ascott Orchard Singapore opened in Dec 2016 and is on track for delivery in 2H17.

Lowered cost of equity from 7.9% to 7.7% 

  • We pare our FY17 DPU forecast from 8.20 S cents to 7.55 S cents as we update our currency parameters and factor in lower RevPAU growth rates for ART’s assets in different cities: Singapore, given the weak corporate demand outlook; New York City with keen hotel room competition; London with the upcoming implementation of Brexit. We believe that contributions from Japan, which made up 16.9% of ART’s FY16 gross profit, will continue to be resilient. 
  • With the change in covering analyst, we lower our cost of equity assumption from 7.9% to 7.7%, after a beta adjustment and taking into account a higher risk-free rate of 2.7% (previously 2.4%). As a result of the above changes, our fair value drops from S$1.24 to S$1.22. 
  • Against yesterday’s price of S$1.185, ART is trading at a forward FY17 yield of 6.4%.
  • We downgrade ART from a Buy to a HOLD as we now see limited upside potential.

Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2017-01-25
OCBC Investment SGX Stock Analyst Report HOLD Downgrade BUY 1.22 Down 1.240