Ascott Residence Trust - OCBC Investment 2017-03-08: Acquisition of prime Orchard asset funded by rights issue

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ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust - Acquisition of prime Orchard asset funded by rights issue

• Cum-rights FV of S$1.16.
• Maintain HOLD against closing price.
• FV will drop to S$1.105 ex-rights.

Launches rights issue to raise S$442.7m 

• Ascott Residence Trust (ART) has launched a fully underwritten renounceable rights issue to raise gross proceeds of S$442.7m. 481.7m new units will be offered at a rights ratio of 29 rights units for every 100 existing units at an issue price of S$0.919 each. 
• The price is at a 21.5% discount to the last closing price before the announcement of S$1.17, and a 17.5% discount to the theoretical ex-rights price (TERP) of S$1.114 per unit. 
• Post-rights issue and acquisitions, ART's FY16 NAV per unit would drop from S$1.33 to S$1.24 on a pro forma basis.

DPU dilutive transaction, but offers ART more financing options for future growth 

• After the acquisition of Ascott Orchard Singapore and the rights issue, ART’s FY16 DPU of 8.27 S cents is expected to be 7.27 S cents on a pro forma basis, and this will further increase to 7.43 S cents after the proposed German acquisitions.
• This pro forma 7.43 S cents DPU translates to a 6.7% yield against the TERP of S$1.114. While the transaction is DPU dilutive, we note it gives ART greater debt headroom for future transactions.

Greater proportion of stable income post acquisitions 

• Our FY17 DPU forecast (ex-rights) is currently 6.27 S cents while that for FY18 is 7.44 S cents.
• Our cost of equity is lowered from 7.7% to 7.5% given the lower gearing as well as the greater proportion of stable income post acquisitions.
• After factoring in the dilution from the enlarged unit base as well as the time gap between the rights issue and the contributions from the acquisitions, our cum-rights FV (which was derived from our ex-rights FV) drops from S$1.22 to S$1.16. 
• The adjustment is a little less than the 10% decrease seen from actual FY16 DPU to pro forma DPU mainly due the decrease in cost of equity assumption. 
• Do note that our S$1.16 FV is cum-rights while all the figures in this report are currently ex-rights. Our FV will drop to S$1.105 when the units go ex-rights. 
• We maintain HOLD on ART with a fair value of S$1.16.

Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2017-03-08

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 1.105 Down 1.220