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

ASCOTT RESIDENCE TRUST A68U.SI

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

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.

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.

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